transcript

Speaker 1:
[00:00] I'm Scott. I'm Bill.

Speaker 2:
[00:02] And we're The Trade Guys.

Speaker 3:
[00:07] We're listening to The Trade Guys, a podcast produced by CSIS, where we talk about trade in terms that everyone can understand. I'm Alex Kisling, and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys. Thanks for listening to The Trade Guys. On today's episode, we discussed the latest impacts from the blockade in the Strait of Hormuz. Then, Bill and Scott provide an update on the administration's use of sections 122 and 301 as part of its tariff strategy. All that and more on today's Trade Guys. All right, Bill and Scott, we're going to start today in the Middle East, but before we get there, Bill, I'm going to turn to you quickly because I know you have an update you want to share with our audience on some news to expect next week. What are you thinking of here?

Speaker 2:
[00:56] Yes, Customs and Border Protection has announced that they are in fact going to roll out their IEPO tariff refund program on Monday, April 20th. We'll see how it goes, and you can be sure that in a future episode, we will tell you how it's going.

Speaker 3:
[01:11] Yes, we will.

Speaker 2:
[01:11] Since it hasn't started yet, we can't make any forecasts. I just want to remind everybody that it looks like the way it will have to work is you're going to have to do two things. If you want your money back, one, you're going to have to ask for it. So there's an application process. It's not going to be automatic. You're going to have to supply the same data that you already supplied. And so just grit your teeth and do it again. And as we said in a previous episode, you're going to have to sign up for their electronic refund process because they're only going to provide refunds electronically. And if you haven't signed up for that, it's not hard, and I don't think it costs anything. You have to go ahead and do that. And you might as well do it anyway if you're in this business because it's going to be relevant to future payments and refunds anyway. So stay tuned. It's all supposed to begin on the 20th, which is Monday. We are recording this on the 16th. 16th. So we will let you know how it goes. All right.

Speaker 3:
[02:09] We'll keep an eye on it. Maybe do it next week or the following week, and we will keep tracking it. But let's get to our first big topic of the day, and that's the situation in the Middle East. And taking a look at the latest trade and economic impacts from what's going on in the Strait of Hormuz. As our audience surely knows, the United States is now enforcing a blockade on maritime traffic to and from Iranian ports, which has triggered another spike in oil prices. US CENTCOM said this week that the blockade has, quote, completely halted economic trade to and from Iranian ports by sea. So Scott, as we move past the 50-day mark since the start of the conflict, where do things stand today from a trade and economic standpoint?

Speaker 1:
[02:47] Well, it's almost impossible to put a pin in this because the situation has moved so rapidly. The pace and tempo of operations is remarkable. I would note that I have taken to considering positions taken by Iran and statements by the Iranian government as sort of a split screen. In fact, there's three panels to the split screen. There are the mullahs who haven't said much since the opening implosion of the leadership when essentially the strikes decapitated, they erupted the brunch, I guess, is the way that we say it. And most of the leadership, including the religious leadership that was present, wound up dead. So it's hard to say what their position is, but certainly if you look at the Iranian Constitution, it's like two parts. There's a religious part and a secular part. But those are two of the three screens available. So you have the mullahs, you have the citizen or the conventional government, and they appear normal, but don't have much power. That's on a normal situation. But they're the people who get sent to the negotiations to talk, but they don't seem to be able to accomplish much. The third group is the Islamic Republic of the Guard Corps, the IRGC, who operates as basically the organized crime faction of the government. And they're quite independent. They're independent in their financing and in their command structure from the other two governments, whatever they are. So it's very hard to sort out. That's as close as I can get personally to it. And as I look at this, you're seeing those three different interest groups, three different parties play out. One of the hard parts of an end game, whenever that comes about, will be to figure out who there is to make peace with or to settle this conflict with, who's in charge. And so, that aside, we've seen a lot of claims and counterclaims about the Strait of Hormuz and what effect that has. And volatility in the, in particularly, energy markets has been massive since then. There are a number of steps taken, including lifting of sanctions temporarily. But overall, energy prices are high and volatile. However, if you think just eight days ago, with 38 days of combat operations, the strait was closing, but that was also the start of the ceasefire. And that was a point in time when, basically, the negotiations team from the US was led by Vice President Vance. Even as you walked out, sounds similar to Reykjavik with Reagan and Gorbachev in some ways. But what it did is triggered a full blockade of Iranian ports that you mentioned by the US Navy. What we realized in that week between April 8th when the ceasefire started, and today, is that probably Iran never really had control of the strait. They never were in a position to close it. Closest control was maritime insurance companies. But they weren't able to enforce their conditions no matter what. The US blockade is vitally important from a strategic standpoint. In my mind, if you're going to go to a war with a petro state, you've got to cut off the energy revenue. Unless you do that, they continue to be able to rearm and redeploy and pay troops and everything else. But I think that was the dramatic effect that the US blockade is having. Now, there's much more to come. You don't have two marine expeditionary forces and the 82nd Airborne in theater to enforce a blockade. They do other things. My sense is something's more to come. But at least that's a way to cut through a little of the fog.

Speaker 3:
[06:12] Yeah. Bill, I want to hear your thoughts. Of course, we're recording this on Thursday the 16th, and anything could happen between now and when this is released on Monday the 20th. Bill, where are you on this?

Speaker 2:
[06:21] I'm really tempted to ask Scott whether every government has an organized crime faction or not, but that would be impertinent in the present circumstances. I had one short-term observation, and I think several longer-term consequences of this, regardless of the immediate end of it, that we're going to have to deal with for, I think, years to come. The short-term thing is, it's a reminder, my column next week is going to deal with this, too. It's the first rule of holes is that if you're in one, stop digging. Trump is in one here, and he's not stopping digging. I don't see a near-term solution to what he's trying to do. I think his thinking probably was that, look what we did in Venezuela. We decapitated them, took the country over and everything is fine, and we did it overnight. So we'll do it again with Iran. And that turned out to be a miscalculation for a variety of reasons. And it also, I think, revealed that they don't really seem to have a plan B for a lot of this stuff. I mean, there were no choice of people that were telling them beforehand, if you do this, the Iranians are going to interdict shipping in the strait, and they're going to use all these economic weapons because that's what they got. And we rolled ahead anyway. And now, they're doing exactly what people predicted they were going to do. And I think we were caught kind of by surprise. We'll see. And now, we're maybe getting organized, but we are still in one of these situations where it's not over. One guy earlier this week characterized this as a state of no war, no peace, and no oil. And that's likely to continue, I think, longer than anybody expected with the result in economic consequences, which is going to be more inflation and over the longer term shortages, to the extent that factories have to close or cut back production because they don't have the energy to keep them running or because they can't get the parts and components that they need, either because they're locked up in the Persian Gulf or because there are, again, fuel shortages that are constraining shipping from other ports. So this is going to last for a while. The longer-term consequences are, I think, three. One, this is a reminder of what we've said on this podcast frequently, which is everything is connected. And you do these things, and then there are always unexpected downstream consequences. And you discover dependencies that you didn't know existed or didn't pay any attention to, and all of a sudden it's a big issue because you didn't see it coming. So we're going through that right now, and competent governments prepare for that, review every contingency, and have a plan for every possible outcome. And it was apparent in this case that we haven't. The second one is, I think it's really ironic that Donald Trump, the apostle of fossil fuels, is now engaged in an effort that's driving everybody away from them. Because what he's demonstrating is that to a lot of countries, particularly in Asia, if you're dependent on fossil fuels, you're vulnerable. Because what the Iranians have done is weaponize that particular item, and they've done it so far fairly effectively. And a blockade, which might be the appropriate military tactic, is only going to make things worse from an energy standpoint. Because what we're doing is turning back Iranian ships, 13, I think, in the last couple of days, latest count, some of which I think were probably carrying oil, so what you are seeing globally, less here and more everywhere else, is let's start thinking about alternative sources of energy. Let's start thinking about electricity. Let's start thinking more about batteries, about EVs, about wind, about solar, all the things Trump hates. What he's doing is driving everybody, no pun intended, driving everybody in that direction, including here. I mean, the market is going to make these decisions, not the government. We'll see what people choose to do. But I would expect an increase in demand for solar panels, more wind projects if they could figure out a way to get around Trump's efforts to get rid of them, greater demand for EVs and a lot more R&D on batteries and battery storage, which is exactly where we were going anyway, pre-Trump.

Speaker 1:
[10:50] It's hard to tell the long-term consequences this close in, but just a couple of observations. First, West Texas Intermediate is at $92 a barrel today. That's not an unheard-of price. That's not even a particularly high price in the last six weeks. And we're exporting oil now, filling up a lot of tankers here that can't fill up in the Gulf. So you may be right about this in the long run, although I think the more likely conversion option would be the gasification projects. I mean, look at what the Lulufwaf flew their planes with. They fueled their planes in 1944. It was coal converted to gasified into avgas. That's how South Africa avoided sanctions in the 70s. So there's technology out there. That will be pursued as well. Nobody's going to be without hydrocarbons forever. But here's the thing. There's a lot of ways this could go. But importantly, I think it's either there's no plan and this is just chaos, or there's a plan that we may not be privy to. I don't think we got to where we are now, which looks pretty strong position militarily, and we're using the ceasefire to refresh the target list, I'm certain. And that control of Iranian ports, US control, is closer to stabilizing shipping in the Gulf than it is disrupting it. So I think that there's a plan that we might not be privy to. Let's watch it work. Let's see what's happening before we project a lot of long-term consequences.

Speaker 2:
[12:16] Well, we'll see what's happening. I'm more pessimistic than you are on this, as usual. And I think that we're seeing some gasification project investments being cut back now in anticipation of more limited demand. So we'll see. The last consequence, also long-term, is I think this has revealed the fragility of the Gulf states. The UAE, Bahrain, Qatar, Kuwait have spent decades telling the reliable, stable governments, you know, fly your airplanes there, use us as a hub, invest here, do business here, we're safe and reliable. And through no fault of their own, I think that's been exposed as not true.

Speaker 1:
[12:57] Well, I think it's just the contrary, Bill. I think the Abrahamic Hordes were just a starting point of a different vision for the greater Middle East, which is based on commerce and cooperation, which those states are practicing now, and they want us to finish the job with Iran. Okay. Iran had the other way, which is, you know, let's use violence and proxy groups and everything to create disorder and get our way that way. So I think the fact that the alliance with the Gulf States has held is evidence that there's something different going on in the greater Middle East. So once again, I'm less skeptical there than you are.

Speaker 2:
[13:36] Well, the question will be what investors do.

Speaker 1:
[13:38] Yes, that is exactly it.

Speaker 2:
[13:39] And the extent to which they pull their money out, they go somewhere else, look for other air transportation hubs, sure, instead of Dubai. Maybe I'm wrong on this, but I think that people are reading the tea leaves in a more pessimistic way right now. But we'll see.

Speaker 1:
[13:56] To my mind, the Gulf States are behaving better than some of our so-called NATO allies. We gotta sort of straighten out who our friends are here at some point.

Speaker 2:
[14:03] You know, but if you look at the post World War II, well, even pre-World War II, history of the Middle East, you know, these conflicts go back, many of them go back millennia.

Speaker 1:
[14:15] Definitely.

Speaker 2:
[14:15] And nobody ever wins. I mean, in the short run, somebody might win. But the people who lose go underground, and then they become terrorists and sort of non-state actors, and they chip away at your credibility for the next 20 years until the next war breaks out. So, you know, the Gulf States may say finish the job in Iran. My point is, we're not going to be able to finish the job in Iran.

Speaker 1:
[14:40] Yeah, what's that mean?

Speaker 2:
[14:41] Because there's always going to be people there that they'll go underground and they'll be back. It's the nature of the territory.

Speaker 1:
[14:47] The famous book of the history of the modern Middle East, the title was The Peace to End All Peace. It's an excellent book, but I forget the author, but I've given away more copies than I can count. But you're right, that's the essential character of that part of the world at this point.

Speaker 3:
[15:02] Well, we can talk about this for hours, but we must move on. I'm going to make a hard pivot here to talk about.

Speaker 1:
[15:08] Talk about trade on the trade guys. You got to be kidding.

Speaker 3:
[15:10] Talk about trade on the trade guys, we must. Let's turn to the administration's use of Section 122. On April 10th, the US Court of International Trade heard arguments in the lawsuit filed by 24 states, challenging the administration's use of 122 to impose 10% tariffs on most imports, which they argue was only an attempt to work around the Supreme Court's IEPA decision. Scott, what are the arguments here on both sides of the case?

Speaker 1:
[15:36] Well, they may be correct on motives, but that doesn't really matter. There has been a long and persistent current account deficit, which turned into a trade deficit over the years, which tariffs would help correct in the medium term. Those large imbalances almost always correct themselves over time. That said, we do have trade deficits now, but we don't have a balance of payments crisis. The difference between when that law was written in 1974 and now are floating exchange rates. Because of floating exchange rates, you don't actually get into the balance of payments crisis that we were facing in 1971 when a French military vessel, naval vessel showed up in New York Harbor asking for the gold and Ford Knox to be delivered to the ship, so we could take it back to France where they wanted it to be, and wound up with President Nixon closing the gold window, which was easier than IEPA. We basically sent a note, handwritten note to the Treasury Secretary, John Connolly, asking to temporarily close the gold window, and temporary still going on and never reopen. But once the gold window was closed and we no longer exchanged foreign currency for gold at a fixed exchange rate, we were able to work our way out of the balance of payments crisis that the country was facing. One would presume Congress wrote this particular section of Trade Act of 1974 with that incident in mind. But whether it did or not, the statute has not been utilized and therefore, there's not really much interpretation, there's not much oversight being conducted on it. Lawyers on both sides are free to speculate. Now, what I think is going to happen here is that the administration is going to be able to use it, and they're using it at the 10 percent level, and they'll continue to use it till the authority expires in 150 days when they'll move to other things. Look, tariffs before President Trump took office were around two and a half percent. Now, that's the broadest possible measure of tariffs. That's total tariff revenue divided by total merchandise trade imports. That's the biggest look you can have. Went from two and a half percent before the Trump began his second term, to roughly 13 percent now, 12 or 13 percent now, which is a big increase, but one that seems to have stabilized, and this is the first move at keeping them there. So, regardless of motives, I think they'll probably get their 150 days.

Speaker 3:
[18:04] Yeah. Bill, what stood out to you from the hearing?

Speaker 2:
[18:07] Well, I do have to point out that I'm so old that I did work on AEPA a little bit. I did not work on the Trade Act of 1974, so I can't provide personal insights.

Speaker 1:
[18:18] I'm old, but not that old.

Speaker 2:
[18:19] Well, I was on the Hill at the time, but my boss was not involved in that particular thing.

Speaker 3:
[18:23] As a very young aid, I'm sure.

Speaker 2:
[18:25] 20s, yes, very young. Scott, I think, has the history right. For those who don't remember the history, the United States up until Nixon was on the gold standard, which means basically that we promised to redeem paper certificates in gold on demand or silver. And if you go back to before Roosevelt, you had banknotes that said that, promised to pay to the bearer on demand $1, $10, whatever it was in gold or in silver. I still have some what are called silver certificates, which were at the time $1 bills, which you could actually, in theory anyway, go to a bank and demand a silver dollar. That of course creates problems for countries, because if there is a huge bump of imports where we're paying a lot of money out, what happens when the foreign holders of all those US dollars, like the French ship, come in and say, give us our gold, and there's a real possibility that you're going to run out. That is a balance of payments crisis. And Nixon took us off the gold standard in order to forestall that. And Congress reacted exactly as Scott said. The current argument is that given that history and given the fact that we are now off the gold standard and exchange rates are flexible, that situation cannot repeat itself. I'm not so sure about that because there are other countries developing countries that have had balance of payments crisis, even though their currency floats. But one of the arguments is that, I think there's basically two. One, we could not have this kind of crisis in the current monetary system that the world has. The second argument, which is probably more compelling, is whether you could have one or not, we don't have one. We're not in a crisis. Yeah. We're not even in a balance of trade crisis, one could argue. Since we've had a balance of trade deficit for 75 years, it's hard to say that this is a crisis. Balance of payments includes more of the trade. It includes basically services, in addition to the goods where we have a surplus, and it includes transfers of money back and forth in a debit credit kind of way. The money that, when we export something, money comes into the United States, that's a credit in the current account. Just like when we buy something from overseas, money goes out. That's a debit in the current account. But if somebody comes to the United States and buys a treasury bond from outside the country, that's an inflow into our treasury, and that counts in the current account. It doesn't count in the trade balance. We'll see. The judge is hearing this case are not the same as the ones that heard the IEPA case. There's three different ones. It was not clear from the oral arguments which way they're leaning. I think a lot of the discussion was, you know, what did Congress mean when they passed this? And unfortunately, there aren't that many congressmen around who were there when they passed it to advise them. So it's hard to predict what they might do. I do think that this court, which is the lowest court on this issue, will probably act fairly quickly. They did an IEPA, but then the appellate process, and there surely will be one, no matter who wins, I think will pass 150 days. So it really is the important issue here, which is our third topic is going to be, what is the administration doing to get ready for July 24th when the 10 percent expires? Yeah.

Speaker 3:
[21:55] Just for context, how quickly was the IEPA decision handed down from this court?

Speaker 2:
[21:59] I think it was about three weeks. Scott, do you remember?

Speaker 1:
[22:02] I think that's right. Okay. It was a fairly expedited arguments.

Speaker 2:
[22:06] People were surprised actually.

Speaker 1:
[22:08] It was faster than expected.

Speaker 3:
[22:09] Okay.

Speaker 2:
[22:10] Yeah. And maybe this one won't be, as I said, different judges.

Speaker 3:
[22:13] Yeah, right.

Speaker 2:
[22:14] But a lot of people are thinking, early May is not out of the question for this.

Speaker 3:
[22:19] Yeah. Well, Bill, you teed up our final discussion topic today, and we're going to check in on the administration's plans for applying tariffs through Section 301. Last week, Secretary Bessent said at an event, we had it set back at the Supreme Court, but we will be implementing or conducting 301 studies so that tariffs could be back in place at the previous level by the beginning of July. So Bill, what's going on here and does that timeline sound right to you?

Speaker 2:
[22:44] I think that's what they intend. Yes. I think the game, they've had Plan B for a long time. I wouldn't say they knew they were going to lose, but this is a case where they realized that they could lose and actually develop Plan B. And Plan B is, let's figure out what laws we can use, essentially, to reimpose the same tariffs. And the 10% is a stopgap because it's temporary, and it's limited to 15% and they've only gone to 10, and Trump said they were going to go to 15. He hasn't done that. I don't think he will. For a variety of reasons, we can avoid the weeds on that one. But their new tool of choice is Section 301, which allows the US Trade Representative, technically, as a matter of law, to take action against countries that engage in unjustifiable, unreasonable practices that burden or restrict United States commerce. I mean, everybody knows he's going to do what the president tells him. But technically, it's the USTR decision, which is important because it means it's subject to the Administrative Procedures Act, which is why they're receiving public comments. That period expired yesterday on the 15th, and why they're going to hold public hearings on what to do about this, which will be in the first week of May. What they did is announce 76 investigations, 16 involving production over capacity by different countries, and 60 alleging either engaging in forced labor or, more likely, not doing enough to prevent forced labor and allowing imports made with forced labor to come into your country. A number of countries are subject to both investigations. But technically, there's 76 of them. And there will be lawsuits on this too. People are already getting ready. You can be sure of that.

Speaker 3:
[24:38] Although Secretary Besson said this week that he feels these are more legally durable. I don't know if you agree with that or not.

Speaker 2:
[24:44] Well, they are more legally durable in the sense, unlike AIPA, 301 does have the word tariff in it. And it is a remedy that the president actually can, or the USTR actually can impose. What the other side will say, the plaintiffs in whatever lawsuits are filed, will say primarily is this is all a scam. None of these investigations are real. The outcome is precooked. Everybody is going to be guilty. And there really isn't any investigation here. And the court will have to decide what it thinks about that, whether it's true or not. And B, even if it's true, whether it makes any difference, because the statute is pretty broad. My prediction about what will happen, this is a fearless prediction, is that everybody will be guilty. And the remedy will be reinstatement of the trade agreements that were negotiated last year. Because if you look at the legal aspects of this, the basis for those agreements was AIPA. And that's been thrown out. So the only basis for at least the tariff part of the agreement right now is section 122. That expires July 24th. If they want to maintain the agreements, they need to come up with another legal basis for them. 301 would be that.

Speaker 1:
[26:01] And 301 is perfect.

Speaker 2:
[26:02] It is perfect for that.

Speaker 1:
[26:03] Because there are unfair practices everywhere. So you get your trading partner to confess to an unfair practice and the penalty is signing the trade agreement. Then the statute underlies the tariffs as applied and everybody goes home.

Speaker 2:
[26:17] Yeah, exactly.

Speaker 1:
[26:18] And Justice Kavanaugh's dissent predicted it perfectly.

Speaker 2:
[26:21] The flaw in the argument is that while everybody is guilty of something, I'm not sure that you could convince the courts that all 16 of them are guilty of forced labor violations, or that all 16 of them are guilty of overcapacity. They're probably guilty of something else.

Speaker 1:
[26:37] Yes.

Speaker 2:
[26:38] And maybe the investigations will end up being broader.

Speaker 1:
[26:42] Yes, unfair practices abound.

Speaker 2:
[26:44] Of course. We've been known to do that ourselves from time to time.

Speaker 1:
[26:47] Once in a while, yes.

Speaker 2:
[26:49] But the administration is going to be challenged to prove it's not a scam.

Speaker 1:
[26:52] Yes.

Speaker 2:
[26:53] And that these are real investigations. And one of the things I'll have to contend with is on the forced labor side, for example. If you're going to decide, for example, that Malaysia, Indonesia, and Vietnam have all not been sufficiently tough on forced labor, then you're going to go on and say the remedy for that is an 18% tariff in Malaysia, a 20% tariff on Vietnam, and a 19% tariff on Indonesia. So, the remedy is different in all three cases for exactly the same offense. And they're going to have to explain that, which has led some people to think that they may not reimpose exactly the agreements from last year. There may be some tweaking in order to resolve questions like that that make it more difficult for the plaintiffs to say, this is just a joke. You cook this up, you decide all these cases in advance. It's not a real investigation, and you're just trying to reimpose the trade agreements, which I think is probably true, but that may not be good enough for the court.

Speaker 3:
[27:59] Scott, close us out here.

Speaker 1:
[28:01] Yes. I think Bill is on the right track. I think that's probably what's going to happen. And this is an opportunity to clean things up. I mean, I think Ambassador Greer has the opportunity because he's thinking about defending this in court to clean up these trade agreements and somewhat harmonize them to the extent possible and make the punishment fit the crime in all these cases. But I think that there's sufficient flexibility. I mean, look, our trading partners always hated Section 301. They tried to get rid of it in trade negotiations every time it came up. And they thought they'd manage to do it, but didn't. But in any case, Section 301 has been limited to two or three cases a year over the 50 plus years it's existed. Now to have it all of a sudden have all these cases. It looks suspicious. They'll have to do something to make it look more legitimate. But at the same time, it's a powerful tool, one that the administration controls. And the confidence with which they're forecasting tariff revenue leads me to believe they got a plan.

Speaker 2:
[29:00] I think it will be hard to convince a judge that the president or the USGR as the case may be, doesn't have the authority to do that and doesn't have the discretion to make these findings. But we'll see. There may be a judge who doesn't buy it.

Speaker 1:
[29:14] Yeah.

Speaker 3:
[29:15] We will see. We'll see. We'll leave it there for today. But before signing off, I'm going to make our dear colleague, Evan Brown blush here because he is an instrumental part of this show. He's an occasional host of this podcast, and we're going to offer him a hearty congratulations on recently accepting a graduate school role at Princeton University, Good University in New Jersey, as I understand it. Evan, we are very proud of you. I know you'll be with us for a little bit longer here, but very excited for you, and I know you're off to bigger and better things after you get that degree in.

Speaker 1:
[29:50] Well done, Evan. Congratulations. Indeed.

Speaker 2:
[29:52] We'll have you back after your first year, and you can pontificate and tell us all you've learned.

Speaker 3:
[30:01] I've never heard anybody from Princeton pontificate.

Speaker 2:
[30:03] There's a whole rabbit hole there if you want to go down it.

Speaker 3:
[30:06] Yeah, I know. You know what? We're out of time.

Speaker 2:
[30:13] Very smooth.

Speaker 3:
[30:13] Trade Guys, thank you so much. Evan, congratulations, and we'll be back with everybody next week. Take care until then.

Speaker 1:
[30:20] Thanks.

Speaker 3:
[30:27] You've been listening to The Trade Guys, a CSIS podcast. For more audio content, visit csis.org/podcasts. Thanks for tuning in.