French Insider Podcast Ep. 37
Trump's Trade War: Tariffs and Their Impact on the Global Economy with Reid Whitten of Sheppard Mullin
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Listen to the podcast released December 9, 2024 here:
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In this episode of French Insider, Reid Whitten, Managing Partner of Sheppard Mullin’s London office and leader of the firm’s CFIUS team, joins host and Sheppard Mullin’s French Desk Co-Chair, Valérie Demont, to discuss the incoming Trump Administration’s proposed tariffs and their potential impact on international trade.
About Reid Whitten
As Managing Partner of Sheppard Mullin’s London office and leader of the firm’s CFIUS Team, Reid Whitten’s practice centers on international trade regulations and investigations.
Reid is a member of Chatham House, the UK's Royal Institute of International Affair, as well as an adjunct lecturer at the New College of the Humanities in London, at the Université Catholique de Lille in France, and at Wake Forest University in the U.S. He also conducts seminars on regulatory updates for industry groups in the U.S., France, Belgium, Spain and the UK.
As a thought leader in cross-border business regulation, Reid is frequently called upon to provide commentary and analysis for television news channels, international newspapers and trade publications. He is also the lead author and editor of The CFIUS Book.
About Valérie Demont
Based in the firm’s New York office, Valérie Demont is a partner in Sheppard Mullin’s Corporate Practice Group, where she focuses primarily on U.S. and cross-border mergers and acquisitions and corporate governance matters. As a leader of the firm’s French Desk team, she advises foreign companies on the establishment and growth of their operations in the United States, acting as de facto "outside general counsel" for non-U.S. companies in the United States.
Valérie has been involved in numerous mergers, acquisitions, joint ventures and dispositions for corporations and private equity funds in the U.S., Europe (including France) and Asia (including India).
Not only is she a frequent speaker at events focused on cross-border trade, but she is also an outside pro bono counsel to Girls Who Invest, a nonprofit organization dedicated to increasing the number of women in portfolio management and executive leadership in the asset management industry.
Transcript:
Valérie Demont:
Welcome to French Insider, the Sheppard Mullin French Desk monthly podcast dedicated to French investors and companies investing and doing business in the United States. Each episode features conversations with thought leaders and experts in various industries on the business environment and challenges in investing and successfully growing in the US. And now for the inside look.
Bonjour everyone, I am Valérie Demont, a partner in Sheppard Mullin's corporate practice group based in our New York office. And thank you for tuning in today's episode of the French Insider, our monthly podcast. I'm delighted to welcome here today my partner, Reid Whitten. Reid is an expert in international trade sanctions, exports and tariffs. Reid is also the managing partner of our London office. Reid, welcome to the show.
Reid Whitten:
Thank you so much, Merci, Valérie.
Valérie Demont:
You're welcome. I am really curious to hear your views here on our new administration and particularly, what is going to happen in the area of tariffs and international trade. As we all know, the first Trump administration privileged tariffs as a trading tool in part for political motivations. I think this time around, we are seeing that they're going to do that again, or at least we've been told they're planning to do that again. It seems this part that it's even more and even more aggressive than under the last administration. So tell us what's happening here.
Reid Whitten:
Thanks, Valérie. Yeah. They're at a general level, I think we can take the precedent of the 2016 to 2020 Trump administration and look to see what that will look like only without some of the limitations that were there of the more savvy political actors, the seasoned veterans that were surrounding the president in his cabinet, maybe checking some of his instincts. And then this time, we'll have a Congress that supports the agenda and a Supreme Court that's fairly in line politically with the other two branches. So the president will probably have more of a free hand to act as he sees fit.
And as we know, from both the last administration and the campaign promises, the president has been quoted as saying the most beautiful word in the dictionary to me is tariff. And while that's not exactly a policy, it certainly gives you an idea of where they're coming from. I think that the Trump administration will view tariffs as the most effective tool, and maybe also the most effective threat, in obtaining their ends in both geopolitical and global economics efforts.
Valérie Demont:
I hear you, and it certainly seemed to be that way in the last administration. This time around, we are seeing tariffs falling all over the place. Naturally, we expected tariffs on Chinese imports and some of the other non-allies of the United States, but now we are hearing tariffs pretty much hitting everybody everywhere.
Reid Whitten:
That's right. And so there are a couple of reasons for that. One, I think that the incoming president views tariffs as a way to resolve what he sees as trade imbalances, to build the US industrial base, and the onshore or nearshore more production and support US manufacturing and businesses by protectionism. Now, there are whole schools of economic debate on whether or not protectionist measures are positive growth for your own country or whether it's tantamount to blockading your own ports. But you're right that it's far spread. And I think another reason for that though is that it is a very headline grabbing statement to say, "I'm going to put 60% tariff on all Chinese goods," or "I'm going to implement tariffs on at 10 or 20% on all the goods from around the world." Those sort of statements allow you to get the attention of your trading partners and should you want to negotiate from that point, you're already at an advantage as you come to the negotiating table. So it's actually an excellent tool, I think from the vantage point of some of the economic advisors in the Trump administration, to start any negotiations on anything that you like from a position of power.
So for instance, some of the most recent rounds of have been tariffs on China, Canada, and Mexico for their role in the fentanyl import into the United States. And so that's a place where you say, "Look, I'm going to put these tariffs in unless you do something," and so that might engender action by both your allies and your adversaries. Another is a threat of 100% tariffs on all items imported from the BRICS countries that are now working together to find ways to not use the US dollar. And so if they drop the US dollars as their official international currency, Trump administration has pledged to impose 100% tariffs on all of their goods. And you can see how with those headline grabbing statements, even if you work your way down from there, you're already negotiating from a position of strength.
Valérie Demont:
So let's get down into the weeds a little bit here and some of the details. So you've said that there would be an additional 10% tariff on Chinese imports, 20% I think I hear on imports from Mexico, Canada, 100% tariffs on the BRICS countries if they drop the dollar as common currency, potentially 10 to 20% for every other nation. Couple things here, where does Europe stand? And particularly for our listeners, how about French products coming into the United States? And are all industries going to be affected? Are they targeting really specific industries? Do we have any guidance there at this point?
Reid Whitten:
We don't have guidance or specifics right now, but what we can say is that if they are implemented, it is very likely it'll affect all industries. There are ways of implementing targeted tariffs. They're often imposed on certain industries to counteract trade imbalances that arise from things like government supporting an industry in the home country. The tariffs on solar cells from China or electric vehicle parts and components are an example where the US views China as supporting those to dump the items into markets. And they say, "All right, look, we're going to put in these countervailing duties to stop that import in that industry."
The type of tariffs that Trump has been discussing have been tariffs on everything from a country. In the last imposition of these, there were exemptions that could be requested and there were exemptions that were granted. We had clients who went in and said, "Look, what about our product? This has not something that needs to be, have a duty imposed on it. It's something that's vital to the US infrastructure and national security." And some of those items were approved and many of them were not. So they were very small, limited exceptions. A lot of them were temporary. They were sunset. They went away after a while. The tariffs as they were imposed in the last administration were broad and I think that they are likely that they will be so again.
Valérie Demont:
So do you expect that imports of French wine, for example, or French agricultural products might be subject to those tariffs, for example?
Reid Whitten:
Yeah. I can't imagine they wouldn't be. Again, especially if the goal is impact, right? You want to make sure that what you're doing gets attention. Putting a tariff on French widgets that go into big machines won't grab the attention that French wine or French cheese or whatever it is that is a cultural point of pride for the country, putting a tariff on that item or those items will certainly have more effect in terms of getting eyes on and getting attention to it, and they're, therefore, maybe inducing the result that you want from your trading partner.
Valérie Demont:
Because you're saying that a lot of it is really more politically motivated and a power play at this point rather than based on good economics?
Reid Whitten:
Good economics is a question we can debate and probably leave for economists, but the economic principles under the tariffs, most of which are, by the way, imposed under Section 301 of the Trade Act, they are imposed to address some sort of trade imbalance. So in every case, there's some underlying reason for... And there are a bunch of different reasons, not just a trade imbalance. There's unfairness and discrimination and mistreatment of US businesses. Those, whatever the grievance might be, could be redressed.
I know that the IP theft and the forced IP sharing by China was one of the grounds for the tariffs that were imposed in the first administration. And the idea would be that China could correct those and get out from under the burden of the tariffs. I think that if you say, "I'm going to put tariffs on all French wine and unless France provides this trade consideration," that's a much more likely scenario. I don't think that there's going to be just it's tariffs for tariffs' sake. Though it may eventually seem like that because of how many different tariff regimes are being threatened, I think that there will be some element of negotiation in the threat of the tariffs. It will be the stick and there will be some other response that will get the carrot of not having the tariffs imposed.
Valérie Demont:
So you talked about exemptions that were in place, or at least a process to apply for exemptions in place during the prior Trump administration. What are we expecting this time around? Do we expect a similar process? Do we expect that it's going to be a rigorous one or a more broadly available one? And linked to that really, is the issue of are we going to have enough people to administer such a process? Because what we are hearing from other podcasters as well as reading in the press is that we can expect a significant amount of turnover among the administrations managing these processes. What are your views?
Reid Whitten:
Yeah, that's right. So there was a process in every one of the imposition of the 301 tariffs in the earlier Trump administration that you could ask to have an item or series of items excluded from the tariff, and there were lists of excluded items. The US trade representative, which promulgates the tariffs, was very skeptical in listening to applications or reviewing applications for the request for exclusions. But they did grant some, and those few, relative few, were narrowly tailored and they were time limited. But I would expect that in the process of implementing these tariffs, you would have at least the process set up for exclusion. The enforcement of this, I think, will be as vigorous as enforcement has been. I think there'll be lots for folks to do when they enforce these tariffs. I think that will be all to the agency, and they have increasingly effective equipment and software for spotting anomalies in import patterns that they can then identify and investigate. So we saw a lot of that by CBP in the last administration and thereafter when they would really get their teeth into these things.
As for drain, that's a separate topic. I don't know if it will gum up the works in the US trade representative office, which again, probably it's the tariffs or the CBP, which will probably be the enforcement mechanism, but there is some. I've spoken to a woman who's high up in the department of state, director of Defense trade controls that does exports, and she said, "Look, when we're not political appointees, it doesn't matter who the president is, we do our jobs." And I think that's right. That's how the administration's, I'm sorry, the bureaucracy of the folks who work in the agencies should be working. And I don't think that simply because it's a new administration that there will be a mass walkout.
Now folks who retire may not be replaced. People who had plans to do something else may go somewhere else. There are a number of appointee level positions that will be emptied and refilled. Some of those positions will be refilled by persons whose main qualification is loyalty to Trump and not necessarily an expertise in the subject they're overseeing. We saw that in the last administration. That can make things more difficult, but I think in general, while we may lose some people, we may lose some expertise. I think that the imposition and enforcement of tariffs will not be slowed down significantly.
Valérie Demont:
You talked about the people. So we now have a good sense of who the President-elect Trump picks for commerce secretary, US trade representative and treasury secretary going to be. Do you have some views and can you share with our listeners a little bit of background on each one of them and how do you think that they are going to be shaping the policies on tariffs?
Reid Whitten:
Okay. President-Elect Trump has named Scott Bessent is nominee for head of treasury, treasury secretary, and Howard Lutnick for the commerce secretary. And so the department of treasury, department of commerce will be run by two folks who have been on Wall Street who are part of the business community who will be very pro-business, but will likely have a steadier hand for some of the more impulsive instincts that the president might have pushing back in some ways in the interest of international and global business. So some of the more maybe nationalist tendencies that might cut the US off from business possibilities, they may be checked by those appointments.
Jamieson Greer, who the president has appointed to US trade representative was the chief of staff for Bob Lighthizer, the former USTR under the last Trump administration. And USTR Lighthizer was very aggressive, very hawkish on China and was instrumental in implementing the across-the-board tariffs on all imports from China at that time. And in fact, he's weighed in on Mr. Greer's nomination and has said that he knows the law and is ready to work hard and agrees with the president and is loyal to the president, all of which sounds like we will be seeing more of the same. And with no real checks on the imposed tariffs, I think we'll see more of the same to a greater extreme. That is higher tariffs against countries that we stated are an adversary, including China, and possibly tariffs against allies like Canada, Mexico, and Europe.
Valérie Demont:
Well, let's talk about that. Assuming these policies get enacted and enforced as per announcements, what are going to be the ramifications on existing multilateral agreements with Europe? For example, can we expect a tariffs war to take place? Did it happen the last time? Will it happen again? What do you think is going to happen there? Because obviously, we can expect that there will be some countervailing duties imposed in some of these parties that are subject to the tariffs.
Reid Whitten:
Yeah. The global response will be really interesting. So first, let's say US puts 60% tariffs across the board on Chinese imports. That will have a huge impact on US production, because consumer prices in the United States will likely create a big jump in those prices. It's not inflationary in the sense it doesn't change the rate of inflation, but it'll feel like inflation because it will make things more expensive. But another thing that will happen is that Americans will choose to buy goods from other places, which means that there will be a lot of Chinese goods that will be looking for a market of last resort that will fall into unprotected markets. And so that might mean that Europe suddenly is awash in Chinese goods that didn't go into the United States, which might tempt the European policymakers to put their own walls up. And that kind of reaction, response and cycle can create a trade war. That's the first, but potential effect in Europe.
The second potential effect is the direct one if US puts tariffs on European imports. I think that they would probably be put in across the board. I don't know that any one country would have an advantage, though I could envision a Trump administration policy where the leaders of various European countries, if they break with EU policy on some point that Trump wants them to break EU policy on, then they get rewarded by having reduction in their tariffs. And it seems like the kind of division to get parties to come to his side that then President Trump tried with the discussions on supporting NATO, on UN human rights, on climate change saying, "Look, America's out of this unless you do it our way," that it would be consistent with policy.
Another interesting twist would be the UK, who no longer have the backup of 27 other members to their trading bloc. And so they are going to have to do a good bit of kowtowing to US interests if they want to negotiate any relief from a proposed tariff. They say, "Oh no. We don't want your genetically modified produce." It might be tough luck. You might have to just accept that. They really they're in a poor negotiating position post-Brexit. Europe, if it can stick together, may have a better chance in negotiating any sort of trade deals. But the threat of tariffs is the serious one and would have significant negative impacts on European economy, including France.
Valérie Demont:
So where does that leave businesses in all of this? For example, you hear today that a number of businesses, particularly smaller ones that used to manufacture in China, had to relocate their productions elsewhere because of the rise in tariffs, and the rise in Chinese tariffs was totally anticipated and expected by those businesses. So where did they go? Well, they went to countries like Mexico, for example. But now you're hearing that Mexico itself is going to be the subject of, what is it? 20% tariffs? Same thing for Canada. So where does that leave these countries? There's Southeast Asia, there's probably other places they can go to, but none of them has a manufacturing capabilities, particularly at scale, that China offered. So what should they do? What should they be thinking of doing, and what have you seen them start to do and think about?
Reid Whitten:
Well, that's a good point, and I think this gets to a larger point, Valérie, that we discussed in the... In the next four years, presentations that I've been giving with a number of our clients and industry groups, we talk about unpredictability. And we know from the first Trump administration that it was difficult to predict from day to day what might happen, and people would limit their thinking because of that. They'd say, "Oh, there's no way that President Trump is going to go and shake hands with the dictator leader of North Korea," or that the US is going to withdraw from the Paris Climate Accord. But in fact, the US did both of those things.
So while we cannot predict any one certain step that a Trump presidency might bring, you can account for it by lifting the limitations of precedent from your thinking. So if you are doing your business planning and saying, "Oh, well, the Trump administration would never put 20% tariffs on all items imported from Europe to the United States," you are at a disadvantage with respect to your business competitors who are planning against that, who are saying, "Okay. I either need to move my production or change how we do our logistics planning."
A tariff on Mexican goods would maybe not cover all Mexican goods. It may be on goods that have a certain amount of imported content. So there might be ways of adjusting your logistics chains and you’re sourcing so that it's more favorable. There may be ways that you can game out how the tariffs would be implemented in Europe so that you can make your sourcing, your logistics, your manufacturing more friendly to American interests and policy, or you can be preparing for how you're going to deal with that hike in your prices of your finished goods or the prices of some of your imports. But to not plan for it, it would be the mistake that would put you behind your competition. To say, "Oh, well, it's not possible that there's going to be a 60% tariff on everything coming in from China," that is going to be some limitation that's going to create a disadvantage for companies that limit themselves with that precedent.
Valérie Demont:
So related question is, are you aware of things that are happening within the United States that would, in addition to trying to escape tariffs, really make it more cost-effective for businesses to relocate their production in the US?
Reid Whitten:
Well, interestingly, the Biden administration has offered incentives for all sorts of US onshoring the Inflation Reduction Act provisions for solar, power and electric vehicle and semiconductor... Well, semiconductor manufacturing was in The CHIPS Act. But all of those things that were encouraged by tax incentives and other structured means of bringing in businesses was inviting foreign development in the United States and foreign investment in the United States. I don't know how much of that will continue under the Trump administration, particularly in the green energy sector. Doesn't seem like that's going to be a policy priority for that administration. But there may well, along with the imposition of tariffs, be some ways of incentivizing companies to bring their production or bring their manufacturing or bring their service positions within the United States to escape the burden of those tariffs and to bolster the US economy.
It's not clear how that would work because the reflex of policy administrators in the last Trump administration was not to allow immigration, was to be skeptical of foreign investment, but something would have to give there in some way. But the advantage will go to the companies that can onshore or nearshore their production or the service position.
Valérie Demont:
And certainly it sounds like from a tax standpoint at least, we are expecting a decrease potentially of taxes in the United States. So maybe that's the potential relief there. Have you seen companies stockpiling importing ahead of schedule, ahead of time into the United States, or is that just marginal at this point?
Reid Whitten:
Yeah. I think companies are definitely planning on sourcing as much as they can get from places that they expect to have tariffs imposed or moving production or sourcing out from those places. So yeah, if you have a comparable commodity that is an input to your business and you could get it from China or you could get it from Vietnam, you're looking very hard at that Vietnam source. It's just a very different possibility.
Interestingly though, European companies may look for the advantage of that watch of Chinese goods that would come in if the US bars them, effectively puts a barrier to their entry, puts a tariff up on Chinese goods, perhaps there will be relative decrease in the price of those Chinese goods as inputs to European manufacturing items. I don't know. It's a bit beyond my realm. It gets into economic models that are beyond me as a lawyer, but it seems like there might be business advantage in that consideration.
Valérie Demont:
And that's very interesting. So I guess my next question would be more around the effect on prices and inflation. We know that the campaign was won, in great part, because of the dissatisfaction of Americans with inflation and the high inflation under the Biden administration. It sounds that this tariffs' policy would only exacerbate the problem. So how effective can that policy, and how long, rather, can that policy be maintained if it's going to continue to drive inflation?
Reid Whitten:
Then again, this gets more into the economics of things, but if I understand correctly, tariffs themselves are not inflationary, which is a funny thing to say because they make prices go up almost certainly. And you've seen proxies for the Trump administration talking on news outlets saying, "Oh, well it's not inflation because the rate of inflation doesn't change. It's just a one-time price hike of 20 or 40 or 60% on all these goods," which to the regular consumer is going to feel a lot like inflation because it means prices go up. So whether or not it meets the technical definition of inflation is not going to be material. And I think that the Trump administration risks getting caught in the same trap that the Biden administration got caught in, which is to tell the American people, "Well actually, it's not so bad if you look at these numbers." And people are like, "No, look, my gas and my groceries cost this much more. I can see it." I don't know how the administration will deal with that except to hammer on the points they have. It will create a rise in prices.
And as we saw in the last administration, that rise in prices didn't go down when tariffs settled or could be planned into the logistics chains. Companies were happy to keep the profit if they could maintain the price and continue the sales. So there is a ratchet effect that once these prices will go up due to tariffs, even if there are companies that can find ways to source their items differently so that they don't pay the tariffs, they don't suffer the burden of those tariffs, they might still keep the prices up because it's a great margin. So it tends to continue to raise prices, and I don't know that there's a way around that except to just blame it on someone else, which is a political measure that has been employed for centuries.
Valérie Demont:
Right. And we've seen discussions during the campaign, but we've also seen it in the European context around price controls and going after the price gougers. Recently, we saw that President Trump has indicated he wanted to put a cap on interest rates charged by credit card companies, for example. So we're starting to see some of these language around price gouging and control in prices in the public discourse here. So maybe that's something that we should expect more of, you think?
Reid Whitten:
That's possible, but it's very interesting, and again, gets to how the Trump administration is so difficult to predict because the isolationist policy, the nationalism is inconsistent with years and years of normal Republican ideology, which was used to be the internationalist global economy supporting party. And to implement price controls or tapping things that aren't free market principles is antithetical to decades of Republican policy. So it's part of that odd dichotomy that we sometimes see in Trump administration policy, where the adopted position of the administration is something that clearly is inconsistent with what Republican dogma has been, but is now the policy. So I wouldn't be surprised, but that's because I, like I said about unpredictability, am not discounting the possibility of anything that might happen in the next four years.
Valérie Demont:
Talking about the last four years before the last four years, where did the tariffs end? Did they end? And where did that leave America and America's economy and its relationships with its trading partners, and can we expect the same outcome this time around?
Reid Whitten:
Well, so they didn't end, which is interesting because the Biden administration took that position of advantage with China. Said, "All right, this is a very much democratic protectionist measure, so we'll take it." And to reduce or lift a bunch of tariffs on China would be seen as weak on China, which was not a politically viable position to take in the last four years. So I don't imagine that there would be some sudden relief, except and unless there was some way that that underlying complaint of the tariff that's saying, "Hey, this is the unfair trade practice that France is engaging in. We want them to stop that or else we're going to put these tariffs on." If there was some way that the target country could make a concession that allowed the US to lift the tariff, that would be one way out. And then it is also possible that for tariffs on countries that are not considered adversaries of the United States, that a following administration may consider just in goodwill, good relations, the idea of reducing those tariffs.
Valérie Demont:
So is there hope for our European allies here?
Reid Whitten:
Yes, although much of it is in either France changing its trade policy, which seems unlikely, or some extremely negative impact of the tariffs such that it becomes anathema to insist on them. And Americans say, "Look, this has been like a Holly Smoot tariff that famously exacerbated the Great Depression and made it worse, and we don't want to see anything like that that causes the..." Yes, we may not want tariffs, but no, we don't want them to go away because we've had some sort of massive economic collapse. I'm hopeful that we find amenable and agreeable ways. Or that perhaps before the tariffs are even implemented on our allies, some cooler heads prevail and say, "Let's save these and think about how we might make more careful use of them."
Valérie Demont:
So any last word of advice or wisdom or hope perhaps for some of our listeners here who are trying to navigate their businesses through these unpredictable times?
Reid Whitten:
Absolutely. Yes. I think that, again, count on the unpredictability, that is don't limit yourself in your thinking. It is grim to think about some of these things, and it is difficult to imagine how it would look if we have 20% tariff across the board on all EU imports. But the advantage that we do have is the capacity to plan and to think about how it is that we, as individuals or as businesses, survive in a world that has changed in that way. And the worst thing we can do is bury our head in the sand and say, "Oh no, it's not going to happen."
I think that we have time now, not long, but a few weeks to get ahead of planning, see where we might be, in that strategic medium range. So not like how do we respond to what's going to happen tomorrow, but not 10 years out, but that two to four years, what can we do to insulate our business against some of the changes that we see coming is actually going to be a competitive advantage and put companies ahead of their competitors in the marketplace by planning for what's coming. Because it's not exactly legal advice, it's more country wisdom, but you don't have to outrun the bear. You just got outrun the other guy.
Valérie Demont:
That's a great word of advice. Thank you, Reid. It's always a pleasure to see you on the show, and I would like to extend a special thanks to all our listeners for tuning in and look forward to seeing you on the next episode of the French Insider.
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