Tariffs: Now What?

A conversation with Joey Politano

Tariffs! Tariffs! Tariffs! There’s a weird delusion among some journalists and investors that the Trump tariff story is over, but it isn’t. So I talked earlier this week with Joey Politano, my go-to guy for tracking what is really going on; you can read his stuff here. Transcript follows.

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TRANSCRIPT:
Paul Krugman in Conversation with Joseph Politano

(recorded 5/14/25)

PAUL KRUGMAN So hi everyone, Paul Krugman here, latest video interview. If you are not in a cabin somewhere in the woods with no telecommunications, you're probably aware that a bit of stuff has been happening on tariffs both in the last few days and last few months. And my go-to expert who really is following this stuff and writing about it and actually grinding through the details is Joey Politano who knows this stuff and is really doing the homework in a way that I'm only doing very imperfectly, so I thought I would talk to him about it and probably address some other issues as well.

Hi Joey, welcome to my virtual studio here.

JOSEPH POLITANO Thanks for having me on, Paul. It's an honor to be here and thank you for the kind words.

PAUL KRUGMAN Yeah, so, let's just start with maybe a kind of general question on tariffs. How do you see where we are on tariffs now? Now that we've just, you know, just two days before we recorded this, Trump suddenly dropped the tariff on China from an absurd 145% to an extremely high 30%. What does the landscape look like to you in terms of, you know, prospects for trade and all of that?

JOSEPH POLITANO I think the key thing to anchor to—especially if you haven't looked at trade data for a while—tariffs generally are very low. The US before Trump took office in 2016, the average was like 1% of all imports had a tariff rate. After Trump took office, you know, he did his entire first term trade war with China.

The average there was like 2.5 to 3%, depending on how you measure. And then when he left, Biden didn't really ease most of the China tariffs, but he didn't add much either. So you basically had the status quo on tariffs throughout most of the Biden term.

And then you have had this term where it went from about 2.5% to something like 20%, this very historic jump. And this reversal on China, which we'll get into the details of in a bit, it basically takes us from where we were before, to the

tariff of abominations in the 1860s. So we're talking about the highest tariff rates since the Civil War to the highest tariff rates since Smoot-Hawley, the tariffs during the Great Depression. So instead of it being the highest tariffs in 150 years, it's only the highest tariffs in a hundred years. So that's still obviously very bad.

And Trump promises more tariffs. So I expect an announcement on tariffs on pharmaceuticals in the next couple of days. There's probably going to be an announcement on tariffs on electronics, tariffs on critical minerals. They just talked about airplanes and trucks, and they keep adding to this list of specific goods that they want to hit with tariffs.

And again, I think to communicate this to normal people

in any other context, the announcement of a 25% tariff on airplanes would have

been like an earth shattering revelation. The announcement of a 10% tariff on Japan would have been considered the worst trade war in, you know, 70 years for the United States. And that is like one small component of the trade war that

Donald Trump has started since the first term. And so we're still in a really bad place when it comes to tariffs.

PAUL KRUGMAN Viewers probably know that Smoot-Hawley was the infamous 1930 tariff that is often, I think, wrongly credited with causing the Great Depression,

but it was still extremely high, although it was a jump from an already quite high level of tariffs. So what we're looking at now is a tariff that's a little bit lower than Smoot-Hawley probably on average, but not much, but it comes from a baseline that's really low, and with trade as a share of the economy, something like three times what it was. So this is an order of magnitude bigger than the Smoot-Hawley shock.

JOSEPH POLITANO Right. And there's some good research that the tax foundation has done. And so if you just look at this as a tax increase, right? So, pretend it's not a tariff, pretend it's just a sales tax. It would be the largest tax increase in more than 50 years. You know, we're talking about larger than bills that were designed to reduce the deficit in the nineties, larger than the tax increases that were used to fund Obamacare. And it's a very bad type of tax.

PAUL KRUGMAN Yeah. So we had this absurd tariff on China. A tariff on China that was so high that it essentially was prohibitive, to use the jargon, was enough that we wouldn't be importing anything from China. In fact, 30% is still pretty high. Isn't that close to prohibitive even now?

JOSEPH POLITANO You think about in the long run, you would expect a tariff

of like 30 to 50% to lower trade with China dramatically. Maybe not quite to zero. Keep in mind that there's a lot of stuff that's exempt partially exempt from tariffs.

Like iPhones only face a tariff of 20% instead of right now 30% or that 145% that they were facing. But basically, the difference between a 60% tariff and a 100% tariff in the long run is nothing because at 60% you're not doing any trade, you know? And at 100 you're also not doing any trade.

PAUL KRUGMAN Okay, yeah, that's actually a very good point. That in some sense, certainly the first 50-60% on a tariff, anything beyond that is just, it's like the old line about ‘The maximum salary at this university is whatever it was, and furthermore, nobody makes that much.’ It's kind of like that. So yeah, this is really crazy. So, I guess how much difference, in fact, did the cut from 145 to 30% make?

JOSEPH POLITANO A big difference. Obviously, China is no longer our largest import partner, but they're still a very large one. And this covered most goods. And so, before this China stuff, Trump announced a “deal” with the United Kingdom, I'm putting that in air quotes. And that deal was, like, microscopic, you know? We're talking about lowering tariffs from 25 to 10% on a subsection of cars, and that's basically all it achieved. This one covers several hundred billion of goods, and we're lowering it by 115%. But I expect it to go back up from here, which is kind of confusing. This whole episode is very confusing. Why are we going up to 145 if we're going to go back down to 30? Why are we going back down to 30 if, as Treasury Secretary Scott Bessent said, “it's a floor and we want to go back up from 30?” So it is continually changing.

But, like you said, we're probably still at near Smoot-Hawley probably levels of tariffs. And there's still a 10% tariff on almost everything that the United States imports. And 25% on a large chunk of what the United States imports, really important stuff like cars. And then, 30% on everything from China, plus the

percentage that Trump did during his first trade war.

PAUL KRUGMAN Okay, in terms of trying to understand the purpose, there has not been any kind of white paper or statement of principles. It's not even as if we can say how does this relate to the administration's principles for tariffs because they haven't announced any.

JOSEPH POLITANO It's really crazy. The administration has never put out a single chart about tariffs. They've never put out a single paper on the policy goals of the tariffs. They've never put out even the things that they're supposed to. They're supposed to put out like a revenue estimate for tax purposes. They've never put one out. And so it's really hard to judge what they're actually trying to achieve. And I think part of that is that there's no coherent vision besides “we want tariffs to be higher.”

And there's a lot of people who are playing different sides on which tariffs they want higher and on whom. So JD Vance last week was on television. People keep asking about dolls because lots of toys are made in China. Toys are like one of China's least important exports in a grand scheme of things. Like, it's much worse for the US economy to lose batteries, which are made in China. But people understand we don't want toys to go up in price. And they asked JD Vance, like, “what are you going to tell a mother who can't get toys because tariffs on China are 145%?” And they're like, “oh, we're going to tell her that we need to like build out an industry in case we need to defend ourselves in a war,”

as if doll production is what is really good for military combat.

And then of course, literally the next week, they're like, “You can import the dolls now.” It’s fine. We don’t have to do that one.

PAUL KRUGMAN Yeah, wow. Well, I want to come back to what we think they're actually doing. Is there any reason why we should be imposing tariffs?

JOSEPH POLITANO I think in this broad context, tariffs are generally very bad.

And especially when you do this in the sense that we're not doing it in a bilateral way. I get that there are specific narrow arguments that people will make about how we need to re-shore this specific production. You know, we want America to be able to build our own semiconductors because we think semiconductors are

really important to economic security, national security. They're an important technological industry. I think those are understandable arguments, but I think the key thing, is the best way to do that is via subsidies, because then you're not creating this uncertainty. You're not antagonizing trade partners and you're not

going through this very, very complicated back and forth.

So you have the subsidies, but I think it's clear that they have an economic cost that you have to bear. We're paying more to build semiconductor fabricators in Arizona than we would if we just bought the semiconductor already fabricated. If we just bought them from Taiwan. If we just bought the semiconductors from a close trading ally. But we also pay for aircraft carriers and lots of things that have nebulous security benefits that we think are important, nebulous economic benefits that we think are important, but have a big upfront cost that's worth paying.

But even the Biden administration, they did tariffs on China. This was a big story, exactly this time last year. They did about $18 billion in tariffs on China. (I'm laughing because Trump unironically does $18 billion in tariffs overnight. The orders of magnitude are insanely different.) But those were very narrow. They were only on electric vehicles, batteries, semiconductors, medical equipment, a tiny share of US-China trade, but in goods that we thought were really important

that we'd made in the United States. And I think that that's clear. They were willing to pay an economic cost. They were saying, ‘we don't want to import this from China. We need to make it in the United States. We understand that it's going to be more expensive for these specific goods. But this is $18 billion against the grand scheme of the United States economy.’

It doesn't move the needle that much, versus Donald Trump, from whom we have a 10% tariff on jet engines from the U.K., on cars from Canada… on bananas! I've been saying that one forever. We have a tariff on bananas right now, which is just ridiculous. That's actually one of the things that really struck me. I don't know if you've ever done this, but a lot of US imports are really not competing with any domestic production. Like bananas, which we just can't grow, or stuff like toys,

where it's just prohibitively expensive to do something like that in the United States.

PAUL KRUGMAN So I'm not sure what the sheer # of imports is, but it's quite large, and yet tariffs are being applied to all of that. It's not something that can even potentially lead to U.S. domestic production of those goods.

JOSEPH POLITANO Right. And the thing that I will say to people who are maybe not that in the weeds, but basically every product gets a little code that's given to it. And then the administration, when they announce the tariffs, they give you a list of codes that are affected or exempted. And so if you look at the list of codes that are exempted, it’s pages and pages long because it's different types of drug medications that they want to hit with tariffs later or different variations on oil or coal, things like that. It would take five seconds, unironically five seconds,

to exempt bananas and coffee. And all of these things that we know for a fact cannot be produced in the United States. We're importing them from countries where it's the most classic example of beneficial trade you could possibly imagine. And they've just sort of rejected that for unclear reasons. People have asked JD Vance and Donald Trump about the banana thing. They never give a straight answer. They come up with something where it's a leverage against Guatemala. Very ridiculous answers, but that's like a clear cut example where

Americans just are paying more for food for zero benefit.

And by the way, American farmers hate the trade war probably more than any other group because they're a major exporter. Our farm industry exports a ton of stuff to China, a ton of soybeans and cotton and sorghum and all that stuff to China and to other countries that are now very upset with us over this trade war.

And so it's not even benefiting farmers because Americans, again, they don't grow bananas.

PAUL KRUGMAN Yeah, I have this old book, of which I'm now just sort of a peripheral author, the International Economics Textbook. And for many years, we had a box about the European discriminatory policy for bananas, basically, from former colonies, which we kept, I think, mostly because we could keep the title of the box, which was, “Do trade preferences have a peel?” But maybe it comes back now, because we've got bananas in the spotlight.

It’s seriously wonky stuff. But Trump protectionism 1.0, the last time around, one thing that was really noticeable was that he actually tended to exempt consumer goods and focus on intermediate goods, on inputs into industry. Is that still happening or is it just that this is so across the board that everything is getting hit?

JOSEPH POLITANO Yeah, that's a really good point. Taking one step back, most people, when they think of imports, they think of iPhones, right? They think of toys, because those are the consumer goods that you see every day that you import.

The big US imports include stuff like iPhones, but it's also car parts and finished vehicles. A Ford car is mostly American but they do this one part in Mexico and then it comes back across the border, then they do another part. Stuff like that. And so during the first term, there was a clear effort to shield consumers, right?

So the tariffs on China always exempted smartphones, always exempted toys, always exempted, like, little Christmas tree ornaments. Things that in the grand scheme of things don't matter a lot. But you would notice as a consumer, the price of a Christmas tree ornament went up, 5 or 10% and you wouldn't notice if the price of a car part goes up by 10% because that's embedded in the car. And that's bad economically because the intermediate parts are what hurts the economy more because Americans use those to manufacture things. There's a car plant in South Carolina that imports parts from Europe and then they use it to make a car. And that relies on a lot of American jobs in the way that the finished car doesn't. But it makes it less noticeable.

This term, they very much eased up on that. Like I said, 10% covers almost everything, but there's still clearly like some stuff they won't touch. iPhones, they won't touch. iPhones right now have an exemption. I think that they might do a tariff on the semiconductor in the iPhone at some point which is kind of an insane thing to do, just from a procedure standpoint. But right now, the tariffs on iPhones are only 20%. And if you have an iPhone that comes from India or Vietnam, which is where a decent chunk of iPhone production is right now, 0%. So there's some stuff that they're not willing to touch.

But again, going back to the banana example, people are going to notice that one. And it would take them five seconds to exempt it, and they won't. And so I think that there's a level of much less concern for consumers noticing, much less worrying about scaring people, which is a bad sign for how intense they want to take this trade war. And also just a lot less care. There's no one who's like, “strategically, I want to do a trade war and I want to win whatever that looks like.

Here's the strategy I have for winning.”

It's like, “no, we want to do tariffs. There's a hundred different plans for tariffs. We're doing them all at once.” And the end result is that you have really high tariffs on almost everything.

PAUL KRUGMAN So this kind of gets to a question of who is actually deciding? We know that Trump personally is deciding kind of the big stuff, or whoever the last person he talked to is deciding that. But like the liberation day, April 2nd tariffs, with different tariffs on every country, do you have any sense,

Who's actually doing that? Who actually did the work for those tariffs? How did this end up being 30%, not 45 or 25 on China? Is there an office? Is there a skunk work somewhere in there that's making the trade policy?

JOSEPH POLITANO I think the difficult answer is that we don't know and we're not gonna know fully. I think the other thing is that there's clearly a lot of different people with different ideas. And as you described, Trump likes tariffs and any idea about tariffs, he's very likely to approve. And so they're approving conflicting ideas. One of my theories about this is: Trump ran on a campaign of a 10% tariff on all US imports and about 60% on China. That's very large. We're currently at a larger amount than that. Or excuse me, we were at a larger amount than that with China. Now we're at slightly less than that, but still.

I think there was an effort after he got elected where people were like, ‘Hey, Mr. President, you shouldn't do these tariffs of a 10% universal tariff. Instead, you should do my plan.’ Right? So someone went up to him said, “Instead, you should do my plan where we're just doing a tariff on cars and pharmaceuticals and semiconductors.”

“Instead, you should do my plan where we do a tariff that's “reciprocal.” We do it based on the trade deficit.”

“Instead, you should do my plan where we do 100% tariffs on China and try to isolate them.”

And Trump never said no to any of these different plans. And so instead of having a 10% universal tariff, someone comes in and says, “we should do a 25% tariff on cars instead.” We got a 10% tariff and a 25% on cars and the reciprocal.

So it just kept stacking up on each other.

PAUL KRUGMAN It’s a Christmas tree on tariffs, if you like Christmas for your legislation where you just keep on adding stuff.

JOSEPH POLITANO There's Peter Navarro, a Trump advisor who you may remember, went to prison for contempt of court in order to benefit Trump. He's a very, very hawkish person. I think he's the one who's behind the April 2nd tariffs.

I think Scott Bessent, the treasury secretary is the one who's behind this current approach, like, “We need to negotiate quote unquote deals to get tariffs down to a more normal level.” I think Howard Lutnick, who's the Commerce Secretary, is the one who's like, “we need 25% tariff on cars, we need 25% tariff on semiconductors.” They're kind of operating on their own economists' ways. And Trump is leaning on them more at one time than another. So you're leaning on Navarro early on. Now he's leaning on Bessent. If he feels comfortable, he's going to go back and lean on Navarro again.

I think the stock market reaction and the bond market reaction to April 2nd really scared Scott Bessent. And I think that they were able to communicate that to Donald Trump in a way that got him to back off. But now that the stock market is back to normal, it's lower than it was pre-April 2nd, but it's close. He feels more comfortable again. He's going to go back to doing what he was doing before.

PAUL KRUGMAN Yeah, it's just worth pointing out, I'm not sure how much people are following, but Navarro is a very odd character. During the first term, they found stuff that for people like you and me would be absolutely career killing.

He’d put out reviews of his own books or actually having cited an expert who didn't exist named Ron Vera, which is just an anagram of himself. There's a deep weirdness about this whole thing that is just hard to believe. But also a very, very hard line. So, I mean, I could go into the theory that appears to underline Navarro's views, but you really think that there is no underlying theory. It’s all different people having different ideas, and it's kind of which courtier got to him last.

POLITANO And so, this is more inside baseball, but Stephen Miran, who is the chair of the Council of Economic Advisers—this is supposed to be an advisory body made up of usually academic economists that are supposed to give advice and regular updates to the president. Miran is the chair right now. And, before joining, he wrote this whole big paper called, I'm going to get the exact name wrong, but it was like “A Playbook for Restructuring the Global Trading System.”

And when he was appointed CEA chair, there's a lot of people who were like, “oh, here's the plan.” You know? If you look at everything that's in this paper that he wrote, they're going to do it. And that paper was like, “there should be differential tariff rates for how close you are to the United States. So the UK should get one because they're closer allies than Europe. Europe should get one because they’re closer allies than countries in Africa…” Stuff like that.

He wanted “burden sharing.” This idea that the American dollar being the world's reserve currency is a burden to the United States because it means we do a lot more finance and a lot more less manufacturing. And the US having to be like the world police quote unquote militarily is a burden on Americans. And we need to share those burdens via tariffs. That was like the theoretical plan. But the things that it called for, like this structured system where countries that were farther away from the United States geopolitically got higher tariffs, and we were going to create a Mar-a-Lago Accord. This idea that we're going to get all the countries together and force them to devalue the dollar, force them to appreciate their own currencies so that Americans could import less, it'd be harder to import stuff because the dollar's worth less compared to the Euro and it'd be easier to export stuff. People were thinking, “this is the idea, this is the big theory.”

And then the April 2nd thing comes around and it's nothing like this at all. And then Miran has to go on record and be like, “yeah, that was like a theory. It's not a playbook. It's called a playbook, but we're not using it as a playbook.” It's just you know, a bunch of ideas that are cobbled together.

And so I don't think there's this overarching master plan at all. I think Trump likes tariffs. I think it's an extension of executive authority. It's something that you can do to change the economy rapidly without having to go through Congress with the normal legislative approval. And so it's like an extension of his power over the economy and that he just dislikes the concept of international trade.

KRUGMAN Yeah. I like to ask people, why can Trump do this? But do you want to just explain why tariffs are not like tax policy? I mean, it is tax policy of a kind, but it's not like income taxes or payroll taxes. It is something that the president can kind of do by fiat. What's your version of why that is the case?

POLITANO That's a really good point because I think there were a lot of people when Trump was running who thought, you know, “he says all these crazy

things about tariffs, but he's not going to be able to do them because Congress is in the way.” You know, he says crazy things about the income tax and they do some of it, but not a lot of it because Congress has rules and votes and you have to go yes or no on things.

Tariffs are very different because Congress has surrendered some level of emergency powers to the president. And the Supreme Court and other courts have, in my opinion, wrongly declared that the president basically has near unlimited authority to declare an emergency for any reason and then to change tariffs because of that.

So when Trump first put a 10% tariff on China, he said, “this is over fentanyl. It's a fentanyl emergency. And so we have to do tariffs.” That doesn't make any sense. Fentanyl doesn't come in the big containers that cars and trucks and electronics come in. It's mostly smuggled by individual people who are driving across the border as part of regular tourism. In the same way you can go and visit Mexico if you really want to. You can go visit Canada and people will just bring drugs across the border. A tariff doesn't change that at all, but courts allow them to declare an emergency over this.

And then secondarily, on April 2nd, they declared another emergency over the trade deficit. So the whole point of the April 2nd thing was that the emergency is that we import too much. And that one's even more farcical because at least fentanyl is really tragic in that it's something that people actually suffer with and die from. But like, you can't just declare the fact that we import things is an emergency.

KRUGMAN Well, right, I was about to say…

POLITANO And then you have the third type of tariffs, the section 232 tariffs.

So basically what happens is the president has authority to restrict imports if they threaten national security. So you have to do some homework and write a big report on why imports of ABC or XYZ threaten national security. And then you can do the tariffs that you want. So when he did the steel and aluminum tariffs, those were investigations that were done in the first term that said imports are a threat to national security. And similarly with the tariffs that we currently have on cars, during the first term they did investigations that said “imports are a threat to national security. You can put tariffs on them.”

I think this is almost even worse because it's supposed to be an academic exercise. People at the Bureau of Industry and Security who are very dedicated civil servants are supposed to come together and have a detailed look on like,

What does the US military need? do they have enough steel that if we got into a war, we would be able to rely on it? And they write long reports. And so on the steel and aluminum front, I'll give an example here. So they said, “we think that some of them are a threat, but Canada, for example, is not a threat because Canada is a NATO member. And they're not overseas. So if we went to war tomorrow, you could still get steel from Canada because you just drive it across the border. It's totally fine.” But their recommendation was ignored.

But now the bureau of industry and security is staffed by a lot of people who are doing, like, sham investigations. Donald Trump says, “I want a tariff on pharmaceuticals.” And then they're like, “let's do an investigation that says pharmaceutical imports are a threat to national security. That says trucks,

that says airplanes is going to be another one, lumber, various critical minerals.

And so he's pre announcing we're going to do tariffs on copper. And then people are going and saying we did an investigation and determined that imports of copper are a threat to national security. It's like, oh, of course you said that because he told you to say that. This isn't a real investigation. They have this whole set of quasi-judicial proceedings that determine whether these things are valid. But everybody involved is in the executive branch and works for the president. Until now they always preserved some kind of integrity as civil servants.

KRUGMAN But that was another country, I guess. Quick question: I'm just curious a little bit personally about pharmaceuticals. Where are the pharmaceuticals that would be hit coming from? Where are we getting pharmaceuticals from that would be suddenly hit by these tariffs?

POLITANO I actually wrote a piece on this because on April 2nd, right, they announced all these tariffs and they exempted a lot of stuff. Remember they exempted iPhones a few days later, but on the day of, they exempted like oil and gold and a few other things. But those few other things were semiconductors and lumber and pharmaceuticals.The exact things that Trump said he wants to put tariffs on later. So the effect was to give you the precise list of things that they want to put tariffs on. And this is again why I'm saying that these investigations are going to be a sham because they gave you the results of the investigation before they did the investigation.

But the pharmaceuticals, most pharmaceuticals that the US imports come from the E.U. There's some that come from Singapore. There's some that come from Switzerland. And then there's tiny amounts that come from India, Canada, a little bit from China. But it's mostly the European Union. And this is one of the more complicated ones because we import a lot of pharmaceuticals. I think people underestimate how big that is. It's like on the size of the amount of cars that we import.

KRUGMAN I didn’t realize that at all.

POLITANO Right. And it's partly a lot of stuff that is legitimate pharmaceutical imports. That are very expensive because pharmaceutical is very expensive. So Ozempic, because that's in the news a lot, is made by Nova Nordisk, which is a Danish company that's based in Denmark. Most of their production is in Denmark or other places in the EU. And then it comes to the United States. But some of the pharmaceutical stuff is kind of slimy tax accounting, right? You have an Irish subsidiary which maybe actually does manufacture pharmaceuticals but charges crazy internal transfer prices so that their profits pop up in Ireland which is a low tax jurisdiction.

Pfizer Ireland happens to make this drug that Pfizer United States says is worth maybe a thousand dollars. And so on the books, it looks like Pfizer Ireland makes a ton of money and Pfizer UnitedStates loses a lot of money. And this is a goal to make Pfizer pay more tax in Ireland, which charges a very low corporate income tax and less in the United States, which charges a relatively higher rate. And I'm going to be careful about my wording here. I'm not specifically accusing Pfizer of anything untoward.

But this in my mind actually goes back to the Tax Cuts and Jobs Act. So if you look at US pharmaceutical imports, they really explode after the 2017 tax reforms that Donald Trump passed. And this is because even though it gave this temporary window for people to reshore quote unquote “profits,” it also incentivized this longer term. It made people secure in this idea that you're never gonna have to pay tax on corporate profits in the United States. So you can safely offshore more of this stuff to book it in Ireland.

KRUGMAN One of my prouder moments, by the way, was when Ireland in one year reported 25% growth in GDP, and it was all about some shift in transfer pricing, probably just one company—which may or may not have been Apple—just changed its tax strategy. And I called it Leprechaun Economics, and that caught on. Even the Irish use that term now.

But, actually, let me ask a substantive question that I have not been able to get straight in my own head. What is happening with, I guess we have to call it the USMCA, the pact formerly known as NAFTA? Because we allegedly have a free trade agreement with Canada and Mexico and now some of it's been abrogated but some of it is supposed to be still honored. How's that working?

POLITANO This is a really good point. I think the first thing to say is obviously we have signed free trade agreements with a lot of countries that we put tariffs on. And this is bad for structural long-term reasons because people are going to trust the United States less. Why would you sign a free trade agreement if the president can just go back on it a year later? So we had NAFTA in the 90s. This was a long-term project to get Mexico on board with a larger free trade agreement that the US and Canada already basically had.

And then you had Donald Trump get elected in 2016 and he renegotiated NAFTA. In practice, almost everything about NAFTA stayed. There were a few changes to rules of origin for cars basically saying, you have to prove that the car is more North American, and it can only use a certain percent American parts, a certain percent Mexican parts, et cetera. And then some rules about factory wages in Mexico. So it really wasn't like a giant restructuring of USMCA. It was just really an annoying thing for the car industry to deal with.

Cars are really important, but it also didn't stop the long-term increase in the Mexican car industry. Mexico is the number one source of car imports. Cars are the number one export from Mexico to the United States. They're an incredibly important industry and a lot of cars that you think of as quintessentially American, like the Ford F-150, are manufactured in Mexico, obviously with a lot of American parts, so still a lot of American jobs depend on this, but it's a very integrated supply chain.

And then Donald Trump gets off to the second time and he's like, I'm gonna do 25% tariffs on Canada and Mexico. Wait, I'm not gonna do it. Wait, I am gonna do it again. Um, then wait, I'm going to exempt the car industry and then wait, I'm going to exempt everything that's USMCA compliant.

KRUGMAN What does that mean?

POLITANO Great question. The bad news is nobody has a good answer. So, if you're a car manufacturer, there's a lot of rules in the USMCA in the text of the bill. It's like, you have to meet these rules: What percent of steel comes from Mexico? What percent of other parts come from Mexico? How much do you have to pay the workers in Mexico? If you are a desktop computer manufacturer, that's the second largest industry that Mexican exports to the US. There's no explanation. The rule is, it has to be substantially transformed in Canada or Mexico, but there's no rules on what “substantially transformed” means. So, effectively, people at customs and border protection are just making a decision

on what is a Mexican good and what isn't, what faces a 25% tariff and what doesn't. And the decision making here is very confusing because nobody knows what the actual answer is. Nobody is able to say, for cars, “This vehicle you called Mexican made and it's okay. But this vehicle, you didn't say it was Mexican made. I am closer to the vehicle and I say it’s Mexican made. And here's my proof.” You can't, you know, there's no history of evidence here.

And I will also say that there are so many things about this trade war that people have forgotten because it moves so quickly. But in February, Trump does the 25% tariffs, Canada agrees to appoint like a fentanyl czar. And he says, “I'm doing a one month pause.” And then in March, they actually go through with the 25% tariffs. And then they back down and say only for non-USMCA compliant goods. What does non-USMCA compliant means? That's your guess. But it's still a big reduction. But they said that's going to be a one month pause. And then in April, we're going to do more tariffs in Canada and Mexico. And they just never came back to that. In April, Canada and Mexico were the only countries exempted from the liberation day announcement. And that one month pause is now going on two months and nobody is talking about it. Like somebody has completely forgotten in the White House or they just want to silently retreat from this idea about tariffs on Mexico and pretend like it never happened.

And meanwhile, by the way, they're still doing the tariff on cars which hits Mexico pretty hard. If they do tariffs on electronics, it'll hit Mexico pretty hard. But as of right now, Canada and Mexico are like the countries that we have the freest trade with because most stuff that they export is USMCA compliant and therefore faces no tariffs, whereas most stuff from the European Union still faces a 10% tariff.

KRUGMAN Okay, so for the moment at least, we kind of still have a mostly free trade zone within North America, though nobody quite knows what’s next...

Wow. I was wondering about that. I guess that's better than 25% across the board, but wow.

POLITANO Right. And I will also say, USMCA was structured so that it has regular renegotiation periods. And that is next year. So presumably what's going to happen is they're going to keep imposing tariffs on specific goods from Canada and Mexico. We have a tariff on Canadian aluminum, we have a tariff on Mexican cars. And then in 2026, they're also going to come together and say, we're going to renegotiate USMCA again and make it even more restrictive at a baseline level. So what counts as USMCA compliant, I think they're going to determine that in a more full sense next year.

This administration really does love kicking things down the road. “We're going to do a 90 day pause… a 30 day pause.” “We're not going to do anything for those 30 days, but we're going to pause things.”

KRUGMAN I remember the original discussions about NAFTA when it was still up in the air. One of the main things about it was it was supposed to facilitate North American business by creating some certainty. And holy shit, I guess we can do that.

POLITANO Right, and at the time, the criticism was against the Mexican government, right? It was too risky to invest in Mexico because they were

changing the trade and tax rules all the time. Now we're the ones doing way, way worse changes on a daily basis.

And I think to your point, it's not the worst thing about this because the tariffs are really bad in general, but one of the worst things about this economically is just, it's totally uncertain. You know, I am tracking this all the time in an extreme level of detail. And there are still very core questions that I don't know the answer to.

And people come up to me and are like, “Hey, are cameras exempt? Because they're electronics.” I'm like, “I don't know.”

KRUGMAN So if you're a camera company, posting on Blue Sky complaining

that Trump officials have ruined your weekend because they just… four days of hard work are suddenly no longer relevant.

POLITANO Right. And it happens continuously. I'm complaining about it in my own personal capacity. But just imagine if you're a small business owner. I'll actually use a great example. I'm going to butcher the name, but there was a card game business. I think it was like Crows and Corns. They do like cute little board games. It's a very indie thing. But the board game pieces, not the whole board game, just the pieces come from China. And in April, they were like, “we are thinking about shutting down and becoming a digital only company because the tariff on pieces is just going to wreck us. And then when the tariffs went to 145%, they were like, “I throw up my hands. I'm done.” You know, here's a successful American business who is losing out, simply because they couldn't predict what the Trump administration was doing. And then all of that got reversed a month later.

So there are millions of people who paid a 145% tariff on Chinese goods because they thought this is gonna stay. “I desperately need to get this one specific component from China.” And then next week it's gone. How are you supposed to, even in the short-term plan around that? And I think you see that with the GDP numbers that came out earlier, where every company in America, the thing that they have to look at first in the morning is, did Donald Trump ruin international trade more today? And it makes it so difficult to do all the normal things that running a business requires, which is a lot of work.

KRUGMAN Okay, we're running long because I like the subject too much.

I know you don't know the answer, but if you have to make a guess, how do you think this all ends?

POLITANO I think there's a lot of people who want it to end with Congress reclaiming control, right? So Congress has granted the president this authority to declare an emergency and then use these tariff powers. Congress can take that away. I don't expect that to happen because it would require a super majority of senators and obviously Republicans control the Senate. You would need to get half of them on board and I think the only person you can get on board right now is Rand Paul, which is crazy. And so I don't think that's happening.

Two is that I think people thought that they would, to use the phrase, “touch the stove.” You touch the stove once, you realize it's a bad idea, you don't touch the

stove again. That's how kids operate. But they keep touching the stove and then they take their hand off and they're like, “oh, that wasn't so bad. I'm going to do it again.”

And so I fully expect that they're going to keep making crazy tariff announcements for at least the full duration of this year. And I fear for the full duration of four years. Right now, it's clear that they want to get tariff rates a little lower than they were on April 9th, lower than that “tariff of abominations” rate.

But 60 days from now, unless Donald Trump signs another executive order, tariffs on most countries go up by another eight or 9% because of the April 2nd tariffs.

And then unless he signs an executive order another 30 days after that, tariffs on China go back to 145%.

And considering that they don't have a long-term plan, I think this is just going to be a background circus of chaos for at least a year, and I fear at least four.

They don't seem to respond even to the unpopularity of it. You look at polls and one thing that you could actually say about the first term trade war is, people liked it overall. Like polling on it was slightly positive. You know, we're talking about like 53 to 47 people support the tariffs on China because people don't like China for somewhat understandable reasons, but they also like the things that they import from China for again, somewhat understandable reasons. But they really hate tariffs on Canada and Mexico and the European Union. You know, this is stuff that polls as bad as the Gulf of America change. People do not like it.

And that hasn't gotten them to back off in any meaningful sense.

Even where we're at right now, where people are so relieved Donald Trump has made such a big retreat in the trade war, we're at Smoot-Hawley tariff levels, the highest in a hundred years. And so it's so difficult to forecast even beyond a week. I didn't expect this tariff reduction to be so large. I thought they were going to go on tariffs on China. I thought they were going to go down to like 60 to 80 percent range. And I expect to be proven wrong a million times more because there is no coherent plan.

But I think my base case right now is we're just going to get constant tariff

movements every month from the White House in a way that's really disruptive to the US economy.

KRUGMAN Okay, I think I'm gonna bring it to a halt right there.

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Follow Joey Politano’s work at Apricitas.io