Making sense of President Trump's tariffs and the world's response

This week's episode of What's at Stake crosses the Atlantic to discuss the impact of President Trump's tariffs with Penta's experts in Europe. Rory O’Donnell, a partner in the Brussels office, and Stuart Harbinson, a senior adviser who has represented Hong Kong to the World Trade Organization, joined Penta managing director Ylan Mui to examine the motivations behind the tariffs and the implications of global retaliation.

Their conversation covered:

• EU and Chinese perspective on trade tensions
• Potential economic consequences for consumers and businesses
• How the private sector can best navigate these turbulent times
• The potential end game for tariffs 

Transcript

Ylan Mui: 0:06

Welcome to this week's episode of what's at Stake. I'm your host, Ylan Mui, a Managing Director at Penta, and today I'm joined by two of my Penta colleagues in Europe to talk about tariffs, trade and their implications for foreign governments and corporate executives. Stuart Harbinson is a Senior Advisor to Penta on international trade policy and he previously represented Hong Kong and the World Trade Organization. We're also joined by Rory O'Donnell, a partner in our Brussels office, who works on international agriculture, food and trade issues.

Ylan Mui: 0:37

Rory, has over 30 years of experience working in the UK civil service, focused on agri-food, trade and Brexit issues. Stuart and Rory, you've seen a lot. There's a lot happening now, so welcome to the podcast. Thanks a lot for having me here. Fantastic Well, we're really glad to have you on because in the past week or so we started to see the first rumblings of at least trade tensions, if not a full out global trade war. President Trump threatening 25 percent tariffs on goods from Mexico and Canada, then delaying them at the last minute for about a month. He did move forward with a 10 percent tariff on Chinese imports. Now there's talk that the EU could be next. Stuart, I'd like to start with you to just get a sense of from where you sit in France. What is the rationale behind these moves? Is there an endgame here?

Stuart Harbinson: 1:31

Well, thanks very much, Ylan, and it's great to be here with you today. It's a very good question. I don't say that I have a crystal ball to be able to predict what the endgame is, say that I have a crystal ball to be able to predict what the end game is, but I think you can discern maybe three motives for the current actions that are taking place. First of all, there's a feeling of the US being treated unfairly, a lack of reciprocity by its trading partners, resulting in trade deficits, which President Trump clearly doesn't like at all. Secondly, there's a revenue-raising rationale which we hear about from time to time, that maybe President Trump wants to switch from taxation revenue internal revenue to external revenue in the form of tariffs. That's an interesting one, because you know, if you choke off trade too much through too high tariffs, then your revenue is also going to suffer. So there's clearly a balance that would need to be struck there.

Stuart Harbinson: 2:43

And then, thirdly, I think it's kind of leverage on non-trade issues as well. We saw that most clearly with Mexico and Canada and the points which President Trump was making about migration and drugs. So I think these are the three things that are behind it, but you know they apply in a different kind of combination to different situations. So, for example, the lack of fairness or lack of reciprocity, that would apply to the EU and China perhaps, whereas the leverage would apply more to Mexico and Canada. But these are not kind of distinct, discrete categories of issues, you know, I think in each situation there's a mixture.

Ylan Mui: 3:36

I want to come back to eventually the point that you made around the use of tariffs as leverage and potentially non-economic issues. But I think one of the things that was really striking, and maybe has a lot of companies worried, is that the tariffs on China have been well communicated since his first run for office and might be even understandable in terms of the geopolitical context in which they're being applied. But you know, to go after our allies seems like a different situation entirely, Stuart.

Stuart Harbinson: 4:08

Well, that is true and you know, one of the points that's occurred to me thinking about this is that you know, the US has a very good, strong trading relationship with many, many countries. If you were thinking about it from a UK perspective I mean, Rory perhaps ought to be commenting on this more than I am, but you know, it would be not unreasonable, I think, for any country which was thinking of having a trade agreement with the US or which already had an agreement with the US, such as, for example, other US allies like Korea and Japan, it would be not unreasonable for them to think well, you know, is this agreement really worth it? Because you know, I'm going to go through a lot of pain, or I have gone through a lot of pain, in order to make sacrifices to get this agreement with the US and now suddenly it's no longer applicable in practice through the effect of additional tariffs which are completely contrary to what's in the trade agreement or in the US's WTO commitments.

Ylan Mui: 5:24

Rory, what's the perspective in the EU?

Rory O'Donnell: 5:27

So the EU have been thinking about it. I mean President Trump in the campaign, talked about tariffs. I mean China featured higher than the EU in the last week or so. He's described the EU-US trade deficit as an atrocity. I think so we feel strongly about it and in some ways, you can see why there is a significant trade balance in favor of the EU for goods, but of course, there's a significant trade balance in favor of the US in terms of services.

Rory O'Donnell: 5:56

So the EU are thinking about it. They are worried about it. They're worried about it for a number of reasons. One, tariffs are bad for trade. It increased costs at various angles and that's bad for economic growth, which is a priority for the EU. They're worried about it, I think, from a geopolitical perspective because in a world where there is geopolitical problems whether it's the war in Ukraine, whether it's the situation in the Middle East, whether it is what ambitions China might have in terms of Taiwan and other things Having allies in trade disputes, it's bad for the economy, but it looks bad as well. So I think they're worried about that. What will they do? I'm sure they're actively talking about what they'll do. I would expect they will respond in the same way as Canada did very quickly, I would imagine the EU are looking at, well, how could they respond if tariffs are put in place, and in many trade disputes the retaliation is very targeted.

Rory O'Donnell: 6:58

So they look at Republican states. The last time we were having trouble between the EU and the US. They look at Harley-Davidson's and denim and Florida orange juice and bourbon, and I guess they're looking at those again. But I think they are also looking at other ways in which they could maybe avoid this or calm this down, and one of the issues that we think President Trump is worried about is how much the European countries pay towards defence. So I think they'll be looking at that, and defence is a much bigger priority for the current commission than it has been previously. So there'll be a combination of is there a way we can negotiate our way out of this problem? But if we can't, well then we have to have a robust response. I think that's where the EU is.

Ylan Mui: 7:42

Don't tax our bourbon right, that'll be one that gets upset here in the US for sure. But to be serious here for a minute, I think you both have brought up a really important point One. Rory, you mentioned the idea of tariffs as potentially a mechanism to get countries to pay more into NATO. Stuart, you also mentioned sort of the leverage of tariffs around potentially social policy issues. I think that one of the things that might be different about the way the Trump administration approaches these tools is that they are fundamentally, you know, economic levers that he's using in other policy areas defense, immigration, health, if you will. When you think about the fentanyl crisis, what do you make of that and what kind of challenge does that pose when elected officials of other governments are thinking about how to respond?

Stuart Harbinson: 8:46

Yeah, I mean that's also an extremely, extremely good question. I suppose in years gone by, decades gone by, you know trade was considered to be a slightly separate sort of issue that could be isolated from other issues. That could be isolated from other issues. And you know trade has, let's face it, trade has prospered. You can argue that the distributional effects have not been very well handled in some cases, but in terms of general prosperity and, you know, development for developing countries and things like that, trade has been really good.

Stuart Harbinson: 9:33

But there is increasingly a tendency, I think particularly amongst developed countries, particularly the European Union, but now also the United States, to link trade with a whole range of other issues and whether you like it or not, I think this is a reality that is going to have to be factored in to countries when they consider their trading rights and trading obligations.

Stuart Harbinson: 10:00

So that's really important. I mean, I think one downside of this is that you know we've got a set of trade rules under the World Trade Organization which, by and large, have been adhered to by nearly all countries, especially by the US in the past, the US in the past. And it doesn't matter so much what the rules are in the WTO, but it's the fact that they provide certainty and predictability. This is really key for businesses. I mean, I've lost count of the number of businesses who have said that the name of the game is knowing what the rules are and knowing that you can rely on the next time you export or import. The rules will be like that. But now we're in completely different territory and it worries me that this could have serious economic impacts in terms of adversely affecting trade and growth eventually, because businessmen will be wondering what's going to happen when they next do a shipment or next receive a shipment. So this is a concern that we're in a new ballgame now MARK WALKER.

Rory O'Donnell: 11:21

I very much agree with that last point. I think what business wants is certainty and consistency, and you know they can make commercial decisions that deal with whatever the rules are, as long as the rules are applied. I mean, I worked on Brexit for a number of years when the UK left the EU and the biggest. I mean there are all sorts of issues with that, but we're not here to talk about that today. But one of the things that business said on both sides of the channel was that the uncertainty both the political uncertainty, given the problems in the UK government at the time caused by Brexit but also the uncertainty about what border checks there might be, what paperwork might be needed for people sending goods in either direction that's what caused the real impact on those. They would have liked as little regulation as possible, but what they wanted more than anything was certainty with what the regulation was. So if there was something, it would apply for every shipment and they knew what to do. And there were several years where that didn't happen and that has had an impact, and an ongoing impact on the UK economy. So I think certainty is important for business and I think growth I mean growth is a big priority for the UK. It is a big priority for the EU.

Rory O'Donnell: 12:32

Ursula von der Leyen made a speech last week. I mean in classic Euro speak, the competitiveness compass. I'm not totally sure what it means, but it basically is around how can the EU get more competitive, and a trade dispute with the US is not on the list of any of the measures that they want. So I think there are issues there as well. It is through certainty and good trading that you can start to look at growth strategies. In a world where things change every other day or every other week, that makes it very hard.

Ylan Mui: 13:01

And I also think that by tying the tariffs to these sort of nebulous non-economic goals makes it that much more difficult to understand. When might the tariffs be lifted right? When is the fentanyl crisis abated enough that Trump would feel that, okay, we don't need to have these tariffs on Mexico anymore? How much is enough to fund NATO before Trump is willing to back down? We did see the sort of 12-hour trade war I guess, if it was with Colombia, was very discreet. Take this plane of migrants and then we will lift the tariff. So that was a very clear beginning and a very clear end. But some of the conditions that seem to be attached to the tariffs make it very difficult to understand when they might ever be lifted, if at all. Stuart, overall, it seems like part of the perception then might be that, because of all of this volatility, the US may not be as reliable of a trading partner as it was previously, and that could create openings for other countries like China, to exercise some soft power. What do you think?

Stuart Harbinson: 14:09

about that. I think China would probably see that as an opportunity. You know, how well that might be received throughout the world is perhaps another question, but clearly it has been the case that the US has stepped back from its traditional leadership role in terms of international trade policy and this has created a vacuum which I think China would be anxious to fill. And I noted that China's response to the latest round of tariffs was reasonably downplayed. They didn't go overboard in terms of retaliation. I think clearly they are prepared to retaliate further if they think it's necessary, but they've been reasonably restrained so far and what they've done is they've started a case at the World Trade Organization to you know, accusing the US of breaking its international obligations. I mean that won't go anywhere because you know the WTO's dispute settlement system is hamstrung at present.

Stuart Harbinson: 15:28

But I think it's an indication that China is saying we're playing by the rules and we're prepared to back the rules-based international trading system in this situation, and that is a form of leadership, I think, by China.

Rory O'Donnell: 15:45

It is interesting, though, because the EU and China are also in a bit of a trade dispute. China are also in a bit of a trade dispute, probably a more reasonable one, in that the EU has imposed significant tariffs on electric vehicles coming from China because they think they're subsidizing and stuff going on that makes them artificially cheap and therefore freezing out European electric vehicle manufacturers and, as a result, china have put in place, I think, part of some brandy and cognac from the EU currently and are looking at pork and dairy. But that's kind of what the mechanism is for we think you're doing something you shouldn't be doing. We're going to take action to try and address it. They say we're not, we take action in retaliation to what you've done. I mean, it's still a trade dispute and it's still bad overall, but it's within the boundaries that we're used to.

Rory O'Donnell: 16:35

I think what's going on at the minute with President Trump is slightly outside that. But you know, the other risk is that, potentially, China gets let off the hook a bit, because there are questions around how industry works in China, whether there's cross subsidies and artificially lower prices for a whole range of goods. But there's a risk that somehow people think, well, that's better behavior and therefore they stop addressing that. Because do you want to be having trade disputes in every direction? So I just think that those sort of implications will take time to evolve. And we see I mean we have seen already that the Colombia thing didn't last very long. The Canadian-Mexican things have been delayed. Let's see if they come back. I mean, I guess they will, but you never know, they may come back in a different form. So it may be that we have a flurry for a month or two or three and then things settle as end games start to appear. But if they don't.

Stuart Harbinson: 17:35

I think it's quite a risky word for movement. Just to add to what Rory's said, it's interesting that when the United States hamstrung the WTO's dispute settlement system by refusing to appoint new members to the appellate body, which is the final sort of so-called court in the WTO, the EU led an effort to plug the gap with a sort of interim mechanism which replicated that sort of quasi judicial process. And China signed up to that, so that both the EU and China are members of this interim mechanism, which is a binding mechanism. So one would hope that any disputes between the EU and China would go through this process and have a kind of rules based outcome that would. That would be very good from a world trading point of view, I think, if that were to happen.

Ylan Mui: 18:37

But of course these things don't happen quickly and that would take quite a long time to emerge it seems that the one thing that the administration may have taken to heart was the immediate reaction of the markets to the threatened tariffs. Markets in the US were down dramatically when President Trump first announced that he would be imposing those 25% tariffs on Mexico and Canada, and so I wonder about the economic reaction. Things take so long and can't even move forward under the WTO. Maybe the economic impact could be one that gives the administration pause as they think about whether and how to move forward with some of these policy moves. The Tax Foundation estimates that tariffs could reduce long-run GDP by 0.2% and cost about 140,000 jobs in the US. What do you see as the economic or potential economic impact in both Europe and China?

Rory O'Donnell: 19:42

Yeah, I mean, I think it's interesting. One of the big issues during the US election last year was around inflation and I think it may take a little while. Businesses have to decide. As you said yourself earlier, businesses have to decide do they pass on the increased costs as a result of tariffs or do they try and absorb it? But whichever route they take, if they try and absorb it, they make less profit.

Rory O'Donnell: 20:06

So that's a problem.

Rory O'Donnell: 20:08

If they pass it on, then you've got an issue with inflation and you know agri-food and drink sector often are seen as one, but it goes beyond that.

Rory O'Donnell: 20:19

So you could end up in a situation where you're causing inflation and, of course, if the dispute is with the EU, then the same happens this side of the pond as well.

Rory O'Donnell: 20:27

So you end up in a world where people are striving for growth but instead they find they're dealing with inflation and increased costs and increased barriers to business, frankly. So, in a simplistic way, I think quite quickly that that's a pattern that we can see and I think it's quite hard to find a way that you avoid that, because I mean, tariffs are a similar form of tax. I mean it's a cost and it works its way through the system in some way or the other, which is why, really, what you have to try and do is see is there a way we can solve the problem. So, is there a clarity of the end point that President Trump would like to get to it, and can the EU find a way of accommodating that, or Canada or Mexico or whoever else he chooses to put the tariffs on? But yeah, I think, relatively quickly, inflation could become an issue for both Europe and for the US.

Stuart Harbinson: 21:20

Yeah, I agree. I totally agree with that, Rory, and you know we'll have to have to wait and see. I mean I I'm not an expert on the on the US scene, Ylan, but I mean if you, if you take the Mexico um Canada issue, I mean I think President Trump's declared an emergency under this International Emergency Economic Powers Act, and you said earlier which I also rang a bell with me you know it's fine to declare an emergency, but how can you say when an emergency is over? I mean, it's a very gray area and in the US I'm not sure whether this would result in a court challenge or whether it would be some sort of action by Congress, but the longer it goes on, the more difficult it will be. And it could be, as Rory said, that it's the markets and the economic situation that actually has the effect first, before all of these things can be worked through. So I mean I think we have to watch that space with great vigilance.

Ylan Mui: 22:32

Yeah, we already saw this week. We're recording this on Friday, February 7th, and I want to make a note of that because, as we've been seeing, the news and the actions have been moving at a fast and furious pace. But this week we did hear from several central bank officials in the US saying that you know they're, they're watching the moves on tariffs because it could stoke inflation, be holding rates, interest rates steady as opposed to cutting them, because certainly if we're seeing higher prices down the line, you know rates would have to stay higher to combat that inflation. You know, I want to ask a sort of we've been talking about those sort of negative impacts of tariffs on businesses, on the economy, on foreign policy. But I do want to ask a little bit of a counterintuitive question, which is are there any sectors in Europe or China that might actually benefit from tariffs from the US or that might actually see a business opportunity in the trade war?

Stuart Harbinson: 23:41

Well, I don't know about that.

Stuart Harbinson: 23:43

I think that is a bit counterintuitive, but I think what's been happening is that Chinese companies have been seeing this coming for a while and have been moving out of China to Southeast Asia to Mexico, of course, as well, and so you have a kind of like a you know, a diaspora of Chinese companies, and what is interesting is whether these will turn out to be new opportunities or whether the you know the effect of the tariffs will be broadened out to cover countries like, for example, Vietnam, which has a very large trade surplus with the US now, in part because of investment from China. So I think that that is something that needs to be watched, and I think you know it will affect perhaps also the judgment of potential host countries for investments from China, whether this is, you know, going to be beneficial for their economies in the long run or whether it's just going to put them in the crosshairs of the US. So this is another moving target, but clearly Mexico is already in the crosshairs and there could be other contenders coming up in that regard as well.

Rory O'Donnell: 25:20

It's quite interesting and it's hard to think in the US. If you're a producer in the US and suddenly there's a 25% tariff on Scotch whiskey or, even better, Irish whiskey and French brandy, well then you may well sell more bourbon because the imports become too expensive. So there could be a short term gain from a bit of market displacement, but that would be, I think, fairly short term and of course you would probably lose a chunk of your export market. So if you're a domestic bourbon producer who doesn't export, there could be something in it for you.

Rory O'Donnell: 25:59

I mean, the other area where President Trump is really unhappy is he doesn't like the fact that Europeans don't buy American cars but Americans do buy European cars. But I'm not sure tariffs is going to solve that problem. So it's hard to say. I mean we don't want to sound so negative about it, but in the end trade is good and has been good for a long time and helps economies and helps relations between countries, and tariffs make trade harder. So there may be some niche areas where people feel a bit better about it. But overall I think the collective loses as a result of trade wars. I think.

Stuart Harbinson: 26:36

Maybe I can just add there, Ylan, that in the first trade war under Trump's first term, under Trump's first term, China, in retaliating, put in a lot of duties on, particularly on, US agricultural exports, and there were countries that benefited from that, particularly Brazil and Argentina in terms of soybeans and things like that, and I think you know the American agricultural community might be a little bit worried that they're going to be targeted again in terms of retaliation and that other agricultural exporting countries will be able to take their place and get markets which they might struggle to win back in due course. So I mean, Rory, this is maybe also your area, but I think that did happen. Brazil and Argentina particularly benefited from Chinese retaliation against the first round of Trump tariffs yeah, I think that's right.

Rory O'Donnell: 27:45

Trump tariffs I think that's right. But it gets you into a sort of wider question of net. Net are things better? So Brazil got a boost and American producers lost. It's not quite a zero-sum game, but you're not far away from it. So I think in the end and I think Stuart's point around it's a temporary measure that costs you a market, but it's much harder to get a market back once you've lost it. I think that's the problem.

Ylan Mui: 28:15

So we've come back around into the slightly more negative it's hard to find that right spot in that bright spot. So I guess you know. Final question, Rory and Stuart when you're talking to businesses, when you're talking to corporate executives and helping them navigate through all of this uncertainty and the volatility and the challenges we've been talking about, is there one piece of advice that you're able to give them? I guess other than you know? Pour out a glass of bourbon or a glass of scotch, as the case may be. You know for the best.

Rory O'Donnell: 28:50

So I had a conversation earlier this week with a colleague who runs the Spirits Trade Association and we're back to drink again. This is terrible.

Ylan Mui: 29:01

It's a great podcast. They love it they love it.

Rory O'Donnell: 29:11

But so, interestingly, the relationship between the you know the eu spirit sector sell a lot into the us and vice versa. So one of the things I was talking to this guy about was have they made contact across the pond so you know, if maybe in the world that each other's respective market is so important to them, maybe a a combined effort on the side of talking to the EU authorities to say, look, don't be doing anything about bourbon, and to the US authorities saying, can we leave the spirit drink sector out of these disputes and put tariff somewhere else? So I think there's something in that and there will be a number of sectors where there is a mutual benefit to trying to avoid them getting dragged in. So we're offering a bit of advice around there.

Rory O'Donnell: 29:54

The other advice I'm giving companies in Europe is talk to the decision makers. The commission will be looking at what it might do under various different scenarios. So be in there, be listening to them, be giving them your view, be giving them good data that will enable them to work out which sectors might work better and which may not, and I think that's important. I mean, in a world where we don't quite know what's going to happen and when. That shouldn't be an excuse not to be talking to the people who will be making the decisions in the end. I mean, our advice is to be getting in front of commissioners, parliamentarians, others, to make their points clear.

Stuart Harbinson: 30:31

Yeah, I totally agree with what Rory has just said. I think that's very interesting about alliances, you know, international commercial alliances, as it were. It's a very, very good point. I think the only thing I can add is that you know that try to maybe activate the importing communities, because you know these are big players retail consortia and people like that and you know they employ a lot of people. So they do have a voice which they should make heard. So they do have a voice which they should make heard as also users of intermediate inputs, because a lot of things are just made globally or internationally now and you can't make something exclusively from within your own country or your own economy. So intermediate trade is really, really important. So just those points to think about. And, you know, stay as flexible as you possibly can. Of course it's harder in some industries and trades than others, but to the extent that you can, you know, be as flexible as possible.

Ylan Mui: 31:46

All great advice and I'll say that we're talking to clients here too about the importance of coalitions. No one company wants to be the subject of that tweet or that truth on truth social right, but this is the importance of trade groups and the importance of sort of industry allies in making the case against tariffs.

So, Stuart and Rory, thank you so much for joining us on today's episode. Really appreciate the conversation. Depending on how things go, we might have to have you back again maybe in the not too distant future to talk on the latest developments, but we really appreciate it.

To our listeners remember to like and subscribe wherever you listen to your podcasts and to follow us on X at PentaGRP and on LinkedIn at PentaGroup. I'm your co-host, Ylan, and, as always, thanks for listening to What's At Stake.