Talking with Chad Bown

About Trump, tariffs and more

Chad Bown, at the Peterson Institute for International Economics, has been my (and everyone else’s) go-to guy on tariffs since the first Trump administration. And although there have been, um, a few other things happening, the past couple of weeks have also been big on the trade policy front. So I thought I’d have a chat with Chad about where we are now. Transcript follows.

. . .

TRANSCRIPT:

Paul Krugman in Conversation with Chad Bown

(recorded 1/29/26)

Paul Krugman: Hi everyone, Paul Krugman again. It’s been a
pretty crazy week and some of it has involved trade policy so I thought that
for today’s conversation, I would talk to Chad Bown, who has
been my go-to tariff person for, I’m sorry to say, nine years, because this all
goes back to Trump 1, although that looks like trivial stuff at the edges
compared with now. And I thought we could talk about all of the tariff stuff
that’s going on behind all of the other dreadful stuff, which we hopefully
won’t have to talk about. Chad is at the Peterson Institute for International Economics and he has a book coming out with Soumaya Keynes, called, How to Win a Trade War. Stuff changes so often now you have to worry about books. Can
you actually do books? Anyway, hi Chad. Welcome to this session.

Chad Bown: Thanks for having me, Paul. It’s good to see you.

Krugman: Let’s talk a little bit before we get to the most
recent events. I mean, during the 2024 campaign, Donald Trump talked about
tariffs and raised some proposals, but I had the impression that most people
following it thought that what he would actually do would be more modest than
what he was talking about. And what we actually got was something that is way
more aggressive even than the campaign. Would you give us an overview of the
trade policy tariff events so far?

Bown: Yeah. And I think that’s the way to get into it.
And even easier is to put it in the context of what it was like in his first
administration, which you and I tracked quite closely. That was monumental at
the time. But all he did really in that first administration that was different
from what anybody else had done was raise tariffs on China.

Krugman: Right.

Bown: And average rates went from 3% to almost 20%. He
put tariffs on steel and aluminum, renegotiated the NAFTA agreement, but really
it was the China thing. And that was monumental at the time. This time around,
he did more than that on China in the first six weeks of his administration. He
put an additional 20% tariffs on China with those fentanyl actions in February
and March. And then tariffs on Canada and Mexico, tariffs on autos. And all of
that was before the really big Liberation Day announcement of April where
everybody in the world was now going to be hit with tariffs, too. And this
happened so quickly and it was so comprehensive. And yeah, he climbed down off
of the Liberation Day tariffs a week later and reduced them to 10% across the
board and then set up these negotiations with 130 something countries all at
once. But at the end of that process, you are now left with average tariffs,
not only on China, but on Canada, Mexico, on Europe, Japan, Korea, all of our
main trading partners that are much, much, much higher than they were before
this all started and really higher than they have been since second world war.
And it happened extraordinarily fast.

Krugman: Yeah, it drives me a little crazy when people talk
about TACO—Trump Always Chickens Out—because although he stepped back on a few
places, overall, tariffs are something like eight times what they were on
average. And although there’s some slippage there, in reality, it’s also quite
a lot higher, vastly higher than they were.

We talk a
lot about China and we talk about the EU and Korea and all that and Canada, of
course, there are really punishing tariffs being put on some emerging markets,
as well. On India, Brazil. I haven’t really followed how much impact those are
having, but it must be severe.

Bown: Yeah, it is. He’s done tariffs on everyone. But he
has put extra special tariffs on Brazil following a disagreement with
Lula and what they were doing with former leader Bolsonaro; a disagreement with
Modi in India about buying Russian oil led to India getting hit with extra
special high tariffs. So yeah, I mean, those countries are hugely impacted
along with other countries in South Asia. Initially in the first Trump
administration, when he only imposed those tariffs on China, the big companies
that kind of make all the supply chain decisions were thinking, well, okay,
we’ll move, we’ll set up a China plus one strategy. We’ll move our supply
chains to Vietnam, Thailand, Indonesia, Malaysia, and set up shop there to be
able to export to the US market from there. Well, all those countries have now
been hit with tariffs of 18, 19, 20%, too. So really nowhere is safe in all of
this. And I think, companies especially are really trying to figure out where
this is going to settle down so that they can begin to make some of their
long-term decisions and investments about planning for the future.

Krugman: There have been some exemptions, right? I think
Apple does a lot of the iPhone assembly in India, and somehow or other, those
are not subject to tariffs.

Bown: Yeah, and this is where it gets complex for those
of us nerds that are really trying to track these things in detail and figure
out where the tariffs apply and where they don’t. You have to read the federal
register and part of the US government documentation process super carefully
and then wait for the guidance from the customs and border protection people to
tell you how to actually try to implement these things. But yeah, India was hit
with, I think it was a 50% tariff overall, but then they did carve out a huge
chunk of the electronics sector, I think out of recognition that Apple
had made big investments in India to try to move some of its supply chains for
the iPhone and things like that out of China. And if your long-term strategy is
to be worried about the problems with China, you didn’t want to really hit that
kind of stuff. So yes, there have been exemptions there.

You know,
we could spend the rest of our lives talking through the complexity of some of
these exemptions for the various tariffs. Not only are the levels high, but the
way that companies are being forced to implement them and the paperwork they
have to provide is mind numbing at this stage.

Krugman: I wonder a little bit about whether customs can
actually handle the complexity. Has there been any beefing up of staff or
resources for customs? How are they enforcing all of this?

Bown: I don’t know. We haven’t heard anything. And so
you can only imagine, because they’re the ones on the ground that have to
figure out ways to actually implement what the administration is doing in
practice and what they’re changing, seemingly every day. And it’s just got to
be one of the toughest jobs out there.

Krugman: Yeah, I mean, it’s also border protection. We’re
not going to get into the events, but isn’t it the same agency that is
supplying some of the people on the ground in Minneapolis?

Bown: Yeah. Customs and Border Patrol is part of this
whole thing. So there’s a lot going on there.

Krugman: My God. So where are we now? I mean, there’s the
headline tariff rates and then there are these carve outs and there are other
ways. I don’t think there’s a lot of actual smuggling going on, though how
would we know, but there seem to be a lot of ways to blunt the impact so that
the actual rise is not as big. I found that revelatory and also kind of
fascinating. Have you been tracking that?

Bown: Yeah, so, I think some of the examples really do
illustrate how complex this is. And one of the more interesting ones, I think,
is the automobile sector. They announced national security tariffs of 25% on
cars back in March or April. And these things were even going to apply to cars
coming in from Canada and Mexico. And if you think about the American
automobile industry, really it’s a North American automobile industry. There’s
a huge amount of investment across the three countries in these really just-in-time
supply chains that have emerged. So suddenly you put tariffs on cars and parts
coming in from one of these places. And the companies are really going to be
affected by that.

And so what they’ve done is come up with some sorts of exemptions where companies can say, “Well, even if I have to pay this 25% tariff, if I’m bringing the final vehicle
in from Canada, I can net out of that the value of the American content. So I
don’t have to pay the tariff on the full thing. It’s only the tariff on the
non-American stuff coming from Canada or Mexico.” So it’s not ultimately going
to be the full 25%, but as a data nerd, I can’t really figure it all out. I
don’t have the information to know how big that is. I’ve been told that maybe
seven or eight percent, so maybe the effective tariff for the cars is not 25
percent, even on Canada, Mexico. It may be just 17 or 18 percent. But that’s
the kind of thing where you really do have to know the details of the
regulations and then what options are open to you as companies and what CBP is
going to believe in terms of the paperwork that you provide to them in order to
make all of this kind of stuff work.

And they’re
really making it up in real time, right? It’s not as if we have a precedent for
how to do all of this. So it’s just enormously complex and ripe for error, ripe
for corruption, ripe for all kinds of bad things, which generally is why over
history we’ve tried to simplify this kind of stuff and avoid these kinds of
situations.

Krugman: Yeah, paperwork is a much bigger issue, certainly
than academic economists like me tend to factor for. We just think, “these are
rules.” But just the mechanics of it, it’s a pretty big deal. Actually, it’s a
very big deal.”

Bown: And a lot of companies don’t even know the
information they’re now being asked to provide. You never before needed to know
exactly how much of your car was American content. Right now, that’s an
incredibly valuable piece of information for you to have because you can reduce
your tax bill. But if you’re one of the big auto companies, you have to go to
all your suppliers and ask them, well, how much of your stuff are you actually
getting from the other suppliers and all the way down your supply chain? And
sometimes they don’t know. And so it takes time. I’m sure there’s a lot
of lawyers making money off of this, but it’s become a lot more costly.

Krugman: So even if it’s supposedly part of the free
trade agreements with Canada and Mexico, we’re saying that that doesn’t apply
to cars except for this content. Other stuff it still does.

Bown: Other stuff it still does if it complies with the
rules of origin, right? So if there is enough American, North American content
in it, then you can get the old tariff, which was typically zero. But again,
provided you can show the paperwork that you have complied with all of those
rules.

Krugman: Yeah, I didn’t know this, but it turned out that
basically a large part of stuff that was eligible to enter free of tariff from
Canada and Mexico was actually paying tariffs because the paperwork wasn’t
worth doing as long as the tariff rates were low. And now that they’re way up
there, we’ve had this sudden surge in actually applying for the tariff
exemption, which has blunted the impact of the tariffs. So there’s a hidden
cost in there. I think General Motors said it’s lost $4 billion to the impact of
tariffs, which is presumably mostly on North American stuff.

Bown: Exactly. It’s not only a question of having to pay
tariffs for the stuff that they might be bringing in from Canada or Mexico or
somewhere else, but they also have to pay tariffs on steel and aluminum, which
are now 50% if they’re importing any of those things. And some of the
automakers have had to start importing aluminum because there was this fire at
a major aluminum supplier in upstate New York, which supplied a ton of aluminum
for the automobile industry that’s basically been either offline or operating
at much lower capacity since September or October. So for the car companies,
it’s been one shock after another.

Krugman: I didn’t know about that. One of the things that
actually has been a shock just generally in this, I mean, we saw some of this
during the post-COVID supply chain stuff. You think of the immensity of the
world economy and that there must be multiple sources of supply, but sometimes
there aren’t. So you’re telling me the fire at one aluminum smelter in upstate
New York has really been a major blow to the auto industry.

Bown: Yeah. That’s been huge. I think another example of
that we saw last year with the rare earth saga. So when President Trump raised
his tariffs by 125% on stuff coming in from China back in April, China said,
“All right, we’ll stop selling you rare earths and that means you won’t be able
to make those things called permanent magnets.” I don’t think any of us knew
what a permanent magnet was before May or June. But all of the auto companies
said, “These things are absolutely critical for cars and if we don’t have
permanent magnets, we’re gonna have to shut down production. So Mr. President,
could you please work out a deal with China so that we could actually get rare
earths and permanent magnets flowing again so we don’t have to lay off a
million workers in our supply chain.” So that was one really big choke point.

And then
similarly when the Netherlands stepped in and had challenges with this company
called Nexperia, which is a semiconductor company. It has recently been bought
by China, but it was still producing the wafers in Europe. And it wanted to
remove the CEO for some reason. The wafers are kind of the pizza that comes out
of the semiconductor oven. They still had to get shipped back to China to cut
it up and then turn it into the little bits that then go into the car, that go
into the seats or the radios or whatever in a car. Well, Nexperia was a huge
supplier for auto parts makers. And the wafers were still going back to China,
but the Chinese government said, “We’re not going to allow the finished
chips to leave China to go to all the automakers to go into the cars.” So
again, that was another choke point that severely impacted the automobile
industry. So again, it’s just one thing after another, despite this not being
the first time that these kinds of things have happened.

Krugman: This is a great example of the interdependence in
the modern world economy. It turns out that cars depend upon wafers made in the
Netherlands but turned into chips in China. Actually, that stuff must be
tremendously high value per weight. So there’s also the shipping costs.

Bown: Well, maybe not. I’ve been told that some of these
chips cost eight cents. But we now live in a world where China has come to
specialize in those types of semiconductors. They’re really low profit margin,
high volume inputs. And China has just come to dominate that market so
everybody else has vacated it. And at the end of the day, China then
essentially has a monopoly and it’s something that they can weaponize if they
choose to do so.

Krugman: Wow, yeah. I talked to Henry Farrell and Abe
Newman about their book about weaponized
interdependence. They were
concerned about the US abusing its centrality in the world system. But it turns
out that we’re not the only ones who can do that.

Bown: 100%. And I think that’s been a lot about what
governments have been worried about the last couple of years—the vulnerability
of their supply chains and seeing how those things could be weaponized—and have
been working to try to do something about it.

Krugman: Just off the top of your head, could you say how
much the average tariff rate has actually gone up at the effective tariff rate?
Do you have an up-to-date number on that?

Bown: I have my own number, but I calculate mine sort of
a different way from everybody else’s. So what I do is I just look at the
policies. The US average toward China is not too far away from 50%. And for
other countries, it’s probably in the 20s. Now, my number tends to be higher
because what other folks do is they look at the ratio of the collected revenue
that you get from the tariffs divided by the amount of imports, which is a
super easy number to calculate. It makes a lot of sense that people use it. But
the challenge is once you impose tariffs that are really high, a lot of those
imports go away and a lot of that revenue goes away. And so the tariff doesn’t
seem to go up by all that much. And so that’s why I do it sort of on a policy
basis, but their numbers are probably more in the teens. So my numbers are
going to be slightly higher.

Krugman: Okay.

Bown: But again, there’s different ways you can
calculate it. It’s super hard. But however you calculate it, these are levels
that we haven’t seen in a really, really, really long time.

Krugman: Yeah, the question becomes, are we back to the
tariff rates of 1935? Are we back to the tariff rates of 1931? It’s a
significant difference because they did come down a bit from that peak, the
Smoot-Hawley peak, but from the point of view of history, did we just blow up
the system? Yes, we did. But the question is, is there a different game?

A different
question is, why haven’t we seen more inflation as a result of the tariffs?
That’s something where the possibility of tariff avoidance is really critical.
But on the other hand, the possibility that you’re just understating when you
look at the revenue because of stuff that we just stopped importing. Do you
have a view on that?

Bown: Yeah, that’s the mystery that we’re all kind of
tracking and trying to get the stories on. Alberto Cavallo at Harvard Business
School has got this Billion Prices Project and he kind of scrapes data in real time to kind of look at that.
My sense from looking at his work is that it’s sort of as we would expect,
comparable to what we saw in terms of the speed of the pass through of the
tariffs of the first Trump administration at a high level. But to your point,
there have been a lot of exemptions.

Things are
different this time around in the sense that they’re hitting different
products. So in the first Trump administration, they primarily went after
intermediate inputs. They stayed away from final goods, which would make you
think that it would take longer for those things to ultimately feed through to
end consumers like you and me, to feed through the supply chain. Now it’s been
hitting everybody, right? And so the first time around, it was just China. Now
the world has changed since Trump 1.0 and maybe there’s more opportunity to
source from outside of China than there was previously. So that would affect
things too. But I agree with you that some of this is just going to be products
disappearing. When we can no longer import something. And you hear anecdotes of
these stories all the time. And it’s not just the final goods that you or I
would buy, but companies saying, “Hold up. Don’t ship us things anymore because
we can’t afford to pay the tariff bill.”

That’s a
different thing for nerds to kind of track and to have feed into inflation
estimates. But it’s going to be a complicated story. It’s one that the nerds
are going to be focusing on and trying to figure out for a long time, I think.

Krugman: I have a whole kitchen cupboard shelf full of
Italian pasta. It turned out to be a false alarm, but we were talking about
100% tariffs on Italian pasta, which would have led to it disappearing from the
United States. And frankly, domestic stuff just doesn’t cut it. So I did
precautionary buying, which turns out to be, well, it’s all right.

Bown: Yeah. It’ll last for a while.

Krugman: [Speaking of Cavallo’s work] I keep a tab open for
the HBS Pricing Lab where they’ve been basically looking at retail prices for and
trying to sort out imports from other stuff. They’re currently saying that
prices overall are something like 0.6 or 0.7 percentage points higher, which is
short of what you would expect if you take the average tariff collections, but
not that much short. It’s like 0.6 versus 1.0. So the pass through is still
short of what you might have expected, but maybe it takes time. Other
people at Peterson have been doing modeling of the impacts, what did you think
that the tariffs were going to do?

Bown: Well, I think it’s really hard because if you’re
one of these folks that tries to model the impact, you’ve got to set the tariff
and then you have to figure out like, okay, what is the response going to be by
not only the little economic agents in your model, but what’s the response
going to be by trading partners and are they going to retaliate? And it’s
really just very difficult ahead of time to have set up your model to predict
all of that stuff correctly.

And so,
many of the results are going to then be dependent on the initial set of
scenarios that you considered. So I think looking back now, we didn’t really
see any of these scenarios play out where China retaliated, but it was
primarily through export restrictions. Canada retaliated, but it was only for a
couple of months. And essentially nobody else did retaliate. And nobody really
modeled that set of scenarios, I think, in their frameworks. So then given
that, I don’t think we should be too surprised to see differences come out in
terms of the predicted effects relative to what we saw in the real world. Plus,
the real world has other stuff going on too. We’ve got the AI boom and other
things, too. So it’s just really, really difficult to control for all of the
other things that are happening at the same time.

Krugman: History is really annoying. Can we just have one
shock at a time instead of all of this cumulative stuff? But let’s talk about
mechanisms. Part of the issue is the legal mechanisms

that have
been used. This is quite extraordinary, right? We’ve just ripped up 90 years of
US reciprocal trade agreements without any legislation. What’s your view on
that? Of course, there’s one big question mark hanging over that. Can we talk
about that for a sec?

Bown: Yeah. We’re waiting for this Supreme Court
decision on whether what the administration did last year with the tariffs is
constitutional or not, and whether it follows the laws in the delegation of
authority. That’s a really, really important question. Now, at one level, the
administration has said, like, “It doesn’t matter what the Supreme Court
decides because we’re just going to impose tariffs some other way. We’re just
going to replace all these IEEPA tariffs with these other laws that will allow
us to impose tariffs for six months and then we’ll figure something out.” So,
okay. But at the same time, if the Supreme Court says you need to refund a
couple hundred billion dollars in revenue that you’ve collected to all of the
folks that paid last year, that’s gonna make life difficult, as well.

So there’s
all these kinds of legal questions that are sort of swirling around. In my view
on this, one of the really, really important things is how this is feeding into
things with other countries. And so the negotiations that some countries have
had with the United States, they may have been trying to slow roll things and
say, “Well, let’s just see if we can get beyond this date for when the Supreme
Court makes its decisions and then kind of go from there.” And so the legal
uncertainty of this, I think, is feeding into what trading partners are doing.
I’m sure it’s also impacting how businesses are thinking about this as well.
And then all of the bigger picture questions that you’ve identified.

Krugman: I should interject that IEEPA is the International
Economic Emergency Powers Act, which nobody thought would be invoked. It’s
pretty weird to actually say we have an international economic emergency and
also the U.S. economy is the hottest it’s ever been and all of that stuff. I
think that about 70% of the tariffs fall under that. And the others are
national security, section 232. And I guess there’s some 301s, which is unfair
foreign competition, just to put that in the mix. And I guess the administration
is saying that there are other things. Although if there were, I’m not sure
they would have done something as legally fragile as IEEPA.

Bown: Yeah. So we’re waiting, right? And it’s funny, the
trade nerd community is now closely tracking the Supreme Court’s calendar and
knows when the Supreme Court has days blocked off on its calendar when it could
release things. And there have been multiple false alarms on that over the last
couple of weeks.

Krugman: Yeah, it’s a wild thing because I don’t know
anybody who thinks that this stuff actually is legal. (Of course, that may be
selective in who I talk to.) But the only question seems to be, does the
Supreme Court find some tortured justification? And with the special, as you
mentioned, refunds, that’s quite an issue, right? I guess Costco and some other
companies have already filed suit saying that they need to be refunded for the
tariffs they’ve paid. And that’s a huge mess. I wonder if they even have records.

In terms of
other countries, kind of the characteristic U.S. view has been that other
countries don’t have agency, they won’t respond, which has been mostly right so
far. Or maybe they’re doing other things. A lot of people expected a trade war
with tit for tat counter-strikes, and that hasn’t happened, at least so far.
What do you think is going on there?

Bown: So I think it depends on what countries we’re
talking about. And it sort of differed by country. I think you look at China,
they did retaliate. They retaliated with what they had the ability to really
punish the United States on and they were incredibly effective. They were also
effective at shutting off exports of soybeans, just like they were in 2018. But
this time what really got the administration’s attention was the export
restrictions on rare earth.

Canada did
try to retaliate and it just kind of wasn’t effective this time around. The
Europeans thought about it. And I think what’s different this time from their
perspectives, compared to 2018, 2019, is that back then, they targeted the
retaliation in a way that they thought could affect the president’s
decision-making. So for Canada, especially, there was the NAFTA negotiations
happening at the time. This was President Trump’s deal. He got the USMCA. He
wanted to see Congress pass it, right? He needed a vote in the Senate. But
because Canada was retaliating against American farm exports, the farm state
senators said, “We’re not going to pass your new trade bill, Mr. President,
until you get the tariffs from Canada and Mexico removed.” And so that was effective
back then.

This time
around, there really isn’t anything that is impacting the president’s decision
making in the same way. And then you look at things from Europe’s perspective
or Japan or Korea’s perspective, trade is important and it’s obviously
important for their economies. But there are these other more important things
like their military security, and NATO, and what Russia is doing in Ukraine,
and is the United States just going to completely abandon that? It’s been such
a big issue for Europe. I think that has taken priority over “should we
retaliate against the United States with tariffs” kind of question.

And with
Japan and Korea, similarly, right? They’ve got China right there. And we’ve got
American troops that President Trump has threatened to either force them to pay
more for, to keep having housed there, or he’s threatened sometimes to remove
them, which would completely force them to redo their military defense
strategies.

For me,
that helps to explain why there’s been kind of a muted response in terms of
retaliation. But that’s not the only thing in the trade front that countries
do, right? It’s what they do bilaterally with the United States, but there’s a
whole huge rest of the world out there too.

Krugman: So I want to just take a moment to enlarge on
that. At this point the U.S. is not providing any money to Ukraine. The United
States isn’t providing military aid. It’s all European money basically now
supporting Ukraine. But some of the weapons systems are still things that only
the United States can provide. The Europeans are basically buying it from the
United States and shipping it to Ukraine. So there’s a concern that the US will
cut it off. The US has already slow-walked some of that, but the Trump
administration could cut off crucial weapons systems, and their air defenses
are already kind of threadbare, which is why there’s no power in Kyiv as we
speak. So those kinds of things are a big deal. But let’s talk about the other
fronts.

Bown: Yeah, so countries are looking elsewhere and it’s
basically, “well, if the United States doesn’t want to accept our
exports…” A lot of economies—Canada you think of, but even a lot of the
countries in Europe are small, right? They need to export to get to scale. And
if the United States isn’t going to be the country that allows them to do it,
they’ve got to find somebody else. And in some instances, that’s China. We can
talk more about that. But what the Europeans have done over the last couple of
weeks is actually come to agreements with first Brazil and Mercosur and so the
kind of South American countries that are big ag producers, although that has
sensitivities for countries like France. So this is not a trivial deal
politically and we’ll see if it ultimately crosses the finish line in Europe
and goes through all the processes.

And then
this week, India which, historically, has not been the most free trader out
there. It’s taken baby steps over the last couple of years. But the EU signing
an agreement with India is kind of a big deal too. So I think those are two
examples of what the Europeans have been doing, saying, “OK, if the US is going
to be less reliable and wants to trade less with us, what else can we do with
other countries around the world?” And the Indians and Brazilians, seeing the
same thing from the United States, have politically at least decided to take
steps that they haven’t been willing to take before.

Krugman: Yeah, there’s been a lot of hype on India, Ursula
von der Leyen calling it the mother of all deals. Among other things, the
mother of all deals, I’d think, would have been the creation of the EU. But
anyway, it’s a trade area of 2 billion people. (I still remember some years ago
there was big hype about a new trade pact including 1.3 billion people, which
was the Iceland-China deal. And yeah, 1.3 billion people, of which 300,000 were
in Iceland.) But still, this is fairly significant. India has a big economy
these days, not what it once was.

Mercosur,
that’s an interesting one because it is being, it seems, slow-walked because of
French farmers. So yeah, how much do you think these sort of alternatives,
pivoting away from the United States, how much difference is this gonna make?
Are we really gonna be seeing a huge reorientation of world trade?

Bown: Not necessarily. I guess for me, what I’m thinking
about is kind of the counterfactual. If my initial reaction was, “I’m really
worried that with the United States closing off, the reaction of the rest of
the world is going to be to close off, too.” The fact that they haven’t closed
off and they’re even showing some moderate signs of trying to open up even a
little bit more to each other is kind of an interesting phenomenon, right? It’s
showing that this Trump populist view of the world isn’t yet taking hold, at
least politically, in all of these other places. But we’ll see. These deals
aren’t done. They’ve got to pass through their legislatures and go through the
political processes at home and politics in all of these countries is
extraordinarily difficult. So there’s a lot of uncharted territory there, but
it is fascinating to see.

And again,
this too is not unprecedented, right? In the first Trump administration, when
he pulled out of TPP on his first Monday in office, everybody thought that deal
was going to be dead. But no, Japan and Canada and all of the other countries
pushed ahead with that trade agreement anyway. It was just that the United
States was no longer a part of it. So the United States is kind of an outlier
in all of this. I think that’s what we’re seeing.

Krugman: That’s a big important point. I was among the
people who have been saying the United States is the hegemon. It’s hegemonic
stability. That’s what holds the whole thing together. If the United States
opts out, then it’s the 1930s again. It’s reciprocal. It’s trade wars. It’s a
Hobbesian world of trade war of all against all. And so far, that’s not
happening. So far, most of the world is continuing to conduct business as it
was, but without the United States.

Bown: Yeah. And that Carney speech in Davos was on this
point, right? A lot of these other countries, you might call them middle
powers, or whatever, but they’re small in an economic and in a trade sense, and
they really rely on a rules based system to be able to achieve scale to be able
to operate above what they would just be able to do if they were only trading
with themselves. So for those types of countries, this may be their only
choice. That they have to now actively try to engage with the other countries,
the smaller countries that are just like them out there in the world that want
to keep on in this kind of outcome. But we’ll see, right? It’s still early days
to figure out how the rest of the world is going to respond.

Krugman: Yeah, Mark Carney, Prime Minister of Canada, who
owes his election to Donald Trump. The liberals were way behind until Trump
started the 51st state stuff and all of a sudden there he was. For once,
there’s a world leader I actually know a little bit personally. And I would
have said he’s absolutely unqualified for the position. He has a sense of
humor, he has a lot of technical expertise, he knows far too much economics. He
was the governor of the Bank of England. But he gave a really important speech.
It wasn’t a fire breathing speech, but he gave a really strong speech at Davos
where he said, basically, “We need to declare independence from the United
States.” I think his audience was basically the Europeans. He was saying, “We
need you, and you want to have this kind of world.”

But yeah,
it’s very early days. I just wonder about diplomacy versus geography. It’s
really hard for Canada to diversify away from the United States because we’re
right next door. And it’s a little hard. India, Brazil are basically far away.
They’re equally far away from the United States and the EU. So they can pivot.
And the EU isn’t that dependent on the US market. But for Canada, it’s really
kind of amazing to have Canada in this position.

Bown: Yeah. And what’s also been really interesting to
watch about Canada over the last two weeks or so is Carney’s visit to China
where he struck a little deal with them. Now, I think it’s important to
characterize the facts of what has happened there. So the history was, back in
the Biden administration, the United States imposed a hundred percent tariffs
on electric vehicles coming in from China, right? They were very worried about
what China’s doing in terms of subsidies and preferential treatment for its
automobile sector. And interestingly and importantly, Canada kind of matched
the policy.

Krugman: Right.

Bown: Canada did the same thing. At some level, it makes
sense. If the United States is going to do this, we’re in the same supply
chain, North America. We kind of have to do it, too, if we want to retain this
integrated North American supply chain. But the important thing was Canada did
it. They economically raised their tariffs on Chinese EVs to also 100%. China
retaliated against them, put tariffs on canola and some other farm products.
Canola is a hugely important export for Canada. And this was not the first time
that China has gone after Canada when Canada did something that was basically
in alignment with what American interests were, right? Thinking back to the
Huawei saga of the first Trump administration when they arrested the CEO of the
company coming to their border. That was also working with the United States.
Again, China retaliated against Canada for that. So that’s what’s happened.

But all
those things, at least the second action on electric vehicles and getting hit
with tariffs on canola, that was with Biden. And I don’t think President Trump
feels any kinship with Canada for things that they may have done for prior US
administrations, even maybe his own prior US administration. It’s “what have
you done for me now?” And instead, Canada just gets hit with tariffs. And so
Canada’s got to figure out what to do. So Prime Minister Carney goes to China
and said, Canada will import some small number—49,000 or something—electric
vehicles from China. And in exchange, China is going to reopen its market to
those canola exports. And it’s a minor thing. It’s just kind of reopening one
market, reopening another market. It’s not a huge trade agreement.

Initially
when that deal was reported, President Trump said, “Well, that’s a great deal
by Carney. He should get whatever deal with China that he can.” And then a week
later it was, “If Canada is going to do a deal with China, we’re going to hit
them with 100% tariffs.” So if I’m Canadian, I’m wondering, you know, what does
president Trump really think about this kind of thing, right? It’s not entirely
consistent.

Krugman: But yeah, it is important, I think, to say while
the EU-India thing looks much bigger, symbolically the Canada-China deal is
huge.

Bown: The symbolism is huge.

Krugman: Okay, so the rules-based system goes all the way
back to 1934, FDR and the Reciprocal Trade Agreements Act, and then the General
Agreement on Tariffs and Trade after the Second World War and so on. The US
seems to be, well, the US has really opted out. Is your sense that the rest of
the world is still going to try to follow GATT rules in trade?

Bown: I think the rest of the world still wants to
follow rules and trade. I don’t think that it’s necessarily going to always be
GATT or WTO, but maybe some sort of replacement, right? So we have
conversations now between Europe and the CPTPP countries about them potentially
doing something together. Some of those rules go a lot further than what’s in
the GATT and the WTO. And some of that is designed specifically to deal with
the fact that the old trade rules weren’t really enough to deal with the China
challenge and its non-market economy and the way it subsidizes its state-owned
enterprises. So you need some rules. I don’t think the old rules are
necessarily where all these other countries are going to end up. But yeah, my
sense is they want rules. And to the extent that trade between them could be
governed by rules, I think that’s something that they would much, much prefer
to do.

Krugman: We don’t know what the US scene will look like a
month from now, let alone in 2029, but if we have a non-Trump-like
administration going forward, will we kind of go back to something like a
rules-based system?

Bown: I think it makes too much sense not to. I think as
we’re gonna learn from this experience, governments—and our government
especially—is really bad at doing certain types of things, right? And kind of
running the day-to-day operations of companies is one of them. There’s a lot of
reasons why the old way wasn’t working. But having a really small number of
folks in the White House or somewhere who should be focusing on national
security issues and a whole lot of other things, overly influencing the day-to-day
operations of companies which know their own supply chains, their own customers
better, is just not the way to do things.

But
companies need rules. They need certainty. So my sense is that something has to
change at some level. I think the rules will be different. We have to figure
out what those rules are. A lot of lawyers in the United States, too, like
having rules, right? It’s just hard to imagine all of that suddenly
disappearing.

Krugman: We built a system that was very much in our image.
We’re a litigious society where lawyers rule almost everything. And we built a
world system where there are all these lawyers. And now, for the time being,
it’s all just whatever the president tweets. Business hates that.

Bown: Business hates that. But the big question is how
do we get those new rules? And I guess the one fatal flaw of the old GATT and
then WTO system is we didn’t have a way to legislatively update them. And so
when they kind of got out of date, when China comes along and it’s clear that
you need some new rules, there isn’t an easy way to just create those new
rules. There were efforts to try and then when they didn’t happen fast enough
and the problems became big enough, then you have someone like President Trump
who comes along and says, “Well, I’m just going to smash the whole thing.” But
I have to think at the end of the day, after the smashing is done, we’re going
to need some new rules. A lot of the new rules might look a lot like the old
rules, right? There may be a lot that we borrow from the past, but there’s
definitely going to need to be some new parts too.

Krugman: So, surprise, a system built in 1947 is not really
great for 2026. However, having no system at all is a big problem. That’s
actually a relatively optimistic take that you’re giving.

Bown: I don’t think it’s gonna happen immediately. And
so I am worried that there is gonna be this lawless period for a while, but
I’ve gotta be optimistic to get myself up in the morning. So yeah, I think
that’s a fair read on where I am.

Krugman: Yeah. I console myself with the fact that I’m not
CEO of General Motors, where at the moment, there’s a lot of headaches that are
just sort of abstract for me.

Okay,
thanks so much for talking.

Bown: Thanks again, Paul. It’s great to be here.