Lori Wallach, director of the nonprofit Rethink Trade, is one of America’s foremost experts on trade policy. As the longtime former head of Public Citizen’s Global Trade Watch, she spent decades analyzing trade agreements like NAFTA and the WTO. She’s testified to Congress multiple times spreading the word about how NAFTA-style agreements prioritize corporate interests over the well-being of workers and the public. To get her insights on trade policy in the new Trump administration, the Labor Press spoke with her via Zoom March 3 and 12.
LABOR PRESS: What do you think so far about Trump’s second term trade policy?
LORI WALLACH: I think it has been without a plan and not very strategic, and therefore unlikely to deliver on his promises of increased manufacturing capacity and jobs in the U.S. and a more balanced trade flow.
The biggest change obviously is the increase of tariffs. Is that a bad idea?
Well, tariffs are a super important tool. I’m all for the use of them strategically to try to bring down our trade deficit, to boost investments in strategic areas of the economy, and to stop the imports of unfair goods made in China, Vietnam and other chronic trade surplus countries. Also to incentivize companies to raise their standards by sanctioning goods that don’t meet ILO (International Labor Organization) standards and key environmental treaty rules. However, threatening tariffs on subjects unrelated to trade? Having a super unpredictable, unstable tariff policy? Tariffs work when there is predictability and stability because you’re sending a signal to investors that if they invest here in production, they will have a certain amount of market available. When you are threatening tariffs against countries because of perceived insults, or a seeming bad mood, and then taking away the threats and then going back to the threats, it’s not going to result in the desired investment in manufacturing, the creation of good jobs, the raising of wages. For instance, these tariffs on Mexico and Canada are ostensibly about concerns about fentanyl. Well, tariffs aren’t going to fix the fentanyl problem. That’s like trying to do surgery with a saxophone instead of a scalpel. Wrong tool. But there is a tool — closing the de minimis loophole that now allows 4 million packages a day, mainly from China, to enter the U.S. without tariffs, without normal customs inspections. That includes fentanyl laced pills from China, fentanyl precursor chemicals from China. Trump originally did close that loophole on February 1, but then he had a meeting with a CEO of Federal Express, who’s a main beneficiary of shipping those packages, and reversed and has now reopened de minimis. If you really wanted to fix the fentanyl issue, you’d close de minimis. Instead, Trump has done the opposite. (Update: Trump issued an executive order April 2, after this interview, saying the de minimis loophole will end)
Isn’t imposing tariffs on Canada and Mexico a direct violation of the “best and most important trade deal ever made by the USA?” That’s what Trump said about the U.S. Mexico Canada Agreement (USMCA), which his administration negotiated in 2019.
There’s a technical answer, and there’s a practical answer. The technical answer is: The USMCA has a pretty broad national security exception, and they are invoking the IEEPA statute (International Emergency Economic Powers Act of 1977) and saying this is about an emergency related to fentanyl. Probably as a legal technical matter, the action is covered by the national security exception. Unlike the national security exception in the WTO (which is useless), this one actually is fairly effective. But that’s not the issue. We have a process. If we’re having a trade problem with Mexico and Canada, as compared to the fentanyl problem that’s ostensibly the basis for these tariffs now, then the answer is to do what Trump said he’s going to do anyway, and what statutorily he’s required to, which is do a review and renegotiation, as needed, of the USMCA. How unilaterally tariffing these countries over something unrelated to trade is supposed to somehow fix our trade issue under the USMCA is nonsensical. I mean, just to start with, the U.S. now has more or less balanced trade with Canada, if you remove oil imports. Our goods trade is basically in balance. We now have a slight surplus in manufactured goods, which is a subset of goods trade, with Canada. That has to do with super-integrated manufacturing, like the U.S. makes certain parts for aerospace, where we send a lot of stuff to Canada. There’s some of that in the auto supply chain. So everyone’s like, why would you target Canada?
Right, where we have a really reciprocal relationship that’s not harming U.S. interests.
But what I’m saying is, targeting Canada ostensibly about fentanyl is just silliness. But then, even if you were really using that excuse because you wanted to be able to use the tariffs for trade purposes, there also isn’t a trade argument. With Mexico, there’s a trade argument. Our trade deficit with Mexico, since the USMCA, has exploded. It’s up like $100 billion a year. Our trade deficit with Mexico was like $151 billion and now it’s like $254 billion. It’s huge. It’s exactly the opposite of what he promised. Plus, offshoring of U.S. jobs has continued significantly. The USMCA did not deliver on the outcomes Trump promised of either stopping the job outsourcing or of balancing trade, getting rid of the trade deficit between the U.S. and Mexico. And there are a couple reasons why. But the way that you fix that is, there’s a built in six year mandatory renegotiation, which starts this year.
I don’t think of Trump as an ideas or details person. Who do you think is the architect of this trade policy?
I think that at this point, the Trump 2 trade agenda does not have an architect. At this point, you have people who know what they’re doing, including new U.S. Trade Representative Jamieson Greer and Peter Navarro (the president’s trade advisor). But he is not heading the agency needed to do the mechanical pieces of the work.
You have also had different people working away at cross purposes, like Commerce Secretary Howard Lutnick. It would be a little bit like inviting a banker to build a house. He has no idea about trade. To say he’s uninformed is an understatement. He just really does not know the basics. He was saying publicly that Japan has 100% tariffs on U.S. autos and that’s why we don’t sell cars there. Anyone familiar with it knows that Japan has zero tariffs on vehicles and has for the last 30 years. You’ve got [Scott] Bessent at the Treasury Department and various outside advisors of the president, particularly of the CEO and billionaire nature, who pop in and out trying to get [Trump] off track from his goals — because it’s not what makes them happy business-wise.
So it’s been extremely chaotic.
There have been a lot of interesting executive orders, and one of them is this “America First trade policy.” One of the things the executive order does is order the Secretary of Commerce to investigate the causes of our persistent annual trade deficit in goods. Maybe you could save Howard Lutnick the trouble and tell us now: What is the cause of our persistent trade deficit in goods?
Actually that January 20 memo is logical. What is the cause of the trade deficit? This gets at this whole crazy “reciprocal tariffs” thing they announced (a Feb. 13 executive order says the U.S. will impose tariffs on goods from other countries that match tariffs they impose on U.S. goods.) The issue for the U.S. is not tariffs in other countries. Tariff levels worldwide are at all-time lows. We’re never going to export our way out of trade deficits. This is the exact lie every union member has heard — one more trade agreement and we’ll knock down some barriers and export our way into nirvana. That is not the issue. The issue is on the import side.
At this point, a vast majority of our trade deficit comes from a handful of countries that have chronic global surpluses, where they’re using beggar-thy-neighbor mercantilist policies. (Mercantilism is a nationalist economic policy that is designed to maximize exports and minimize imports.) It’s to the point where it’s not just the United States that needs to put up tariffs. Brazil started doing it. Argentina is doing it. South Africa is doing it. China and Vietnam are the biggest by volume. Germany, interestingly, has a global trade deficit with the rest of the world, and part of that is they’re hiding in the euro zone instead of trading on their own currency. So it’s like having a huge currency devaluation for German exports. Plus, their domestic policies basically suppress consumption.
So that set of countries are chronic global surplus countries. The policies they use are a combination of massive subsidies and currency manipulation — either devaluation or hiding in a pot that has lower value like the euro, or holding way more dollar reserves than is necessary for balance of payments to bid up the value of the dollar, the classic thing that China does. That, plus suppressing wages by busting any hope for independent unionism. That combination of stuff means that we have like 75% of our trade deficit coming from a handful of these mercantilist countries.
That’s where the tariffs come into play. Tariffs need to be coordinated with other countries that are chronic trade deficit countries. Tariffs can keep out imports made under those chronic imbalance factors so that we have some chance of domestic production satisfying domestic demand, but also so that those surplus countries have to allow more domestic consumption of their production. They’re going to have to change their policies, for instance raising wages so that more of their production can be consumed by domestic consumers. They won’t have markets to dump this stuff on the rest of the world. Or they’ll have to shrink production. But that will be a domestic adjustment that the Chinas and Vietnams have to make.
In addition, for the US, we have a large bilateral deficit with a deficit country. Mexico is a global deficit country. Mexico right now is offering to put up external tariffs on China as a way to persuade Trump not to put tariffs on Mexico, because they have a global deficit now. They are getting de-industrialized by China too, and we have a bilateral deficit with Mexico. But part of that is because now all kinds of transplant investment from Asia, including China, is going to Mexico to try and produce the things there. Then it would enter duty free under USMCA. It would otherwise be subject to enforcement sanctions if it was actually coming from China, or steel limits if it was actually coming from Korea. We have a brand new honking huge steel trade deficit and dumping from Mexico. Part of that is investment from countries against whom there have been (Section) 232 sanctions since 2018 that Biden left in place. (Section 232 of the Trade Expansion Act of 1962 authorizes the president to adjust imports of goods if they threaten to impair national security, for example imposing tariffs on steel and aluminum imports.)
So there is this global dynamic that tariffs can help with. And by the way, we should be doing it in partnership with other countries that are not using this sort of mercantile set of machinations. The way to deal with the bilateral issue is to renegotiate the USMCA, which is slated to be done imminently.
But tariffs alone will not create jobs, will not raise wages. We also need the rest of the industrial policy toolkit, namely the kind of things that were in (President Joe Biden’s) Inflation Reduction Act and in the CHIPS bill, where we drive investment in manufacturing by creating manufacturing tax incentives. We can create demand for American-made goods by having consumer tax incentives where you get a better tax credit if it’s a domestic electric vehicle for instance. And we can also use Buy American policies to drive domestic demand through government procurement. These are all industrial policy tools that we have readily available that if paired with strategic tariffs, and particularly tariffs coordinated with other countries. Most of the world is now in a net deficit to China. Then we could actually start to rebalance our trade.
But that is not what the Trump folks are doing. It is closer to what they were trying to do in the first term, but it’s not what they are doing now.
This is a much more nuanced discussion of tariffs than I’m seeing elsewhere. There’s kind of a knee-jerk reaction in some media, like if Trump does it, then it’s bad. There are a lot of fears about inflation, that tariffs are going to be bad because they’re going to raise prices. Do you have an answer to that?
That is a combination of people not knowing the facts, and Trump reaction syndrome, which I totally respect — I’m regularly triggered myself, so I’m not criticizing anybody. I have a staff person whose job, in part, is to remind me that I need to just focus on the actual tariffs and not add my commentary about how otherwise rattled these people are making me.
So the facts on the ground are: We did not see a boost in inflation during the first Trump tariff imposition period, which involved 19.4% average tariff rates on two thirds of all of our imports from China, which ain’t nothing. I mean, that was a big thing. And, we had tariffs on a lot of steel and aluminum imports, and yet we did not see the promised huge boom in inflation. In fact, during all of that, inflation stayed flat. And if you go to our website, rethinktrade.org, you can see basically that the tariff imposition does not in any way track the jump in inflation. What tracks the jump in inflation actually is the jump in corporate profits. A lot of companies made a lot of extra money by price gouging, particularly after the supply chain disruptions of COVID. When they raised prices, they never really brought them back down. So you see this huge spike in corporate profits that aligns with, though it’s about three months ahead of, when the curve moves for inflation. We have jumps in inflation driven by corporate profiteering. You see inflation is flat until you’re about five months into the pandemic. Now, what’s ironic is that Biden then cut some of the original Trump tariffs, and inflation doesn’t go down. So not only did inflation not go up when Trump put in the tariffs, but it didn’t go down when Biden took them out. A lot of it has to do with corporate concentration, which gives them the ability to do a lot of price gouging and take profits off of consumers.
Now, a separate issue is retail prices. Tariffs are applied on the wholesale price. So the Nike shoe that’s designed in Oregon and made in China, it retails for $125. They’ve done research to know that they’ll sell the biggest number of units with that markup — at $130 they’ll sell less volume, so that even with the bigger markup, they won’t make as much money. Remember that the landed price of the imported shoe on which the tariff is imposed is under $25. So even if you put a 25% tariff on that shoe, you’re talking about $6 and change. They’ll just eat, in their profit margin, the potential wholesale markup. The most comprehensive study of the 2018 tariffs showed that the vast majority of the tariff price was absorbed out of the profits of retailers. There were two sectors where there was some small rise in retail prices, and those were, interestingly, sectors where there’s less concentration. But in 12 sectors of the economy, basically the wholesale price increase from tariffs did not translate into higher consumer prices, but rather was cut from profit.
There also seems to be a misunderstanding about how inflation works. It’s an ongoing acceleration in prices. With a one-time readjustment in the level of one input, you might think prices will jump 1% or something like that. But it’s not like they’re going to jump again another percent the next year, because the price already adjusted, right?
Exactly.
The labor movement used to be a loud and organized voice on trade policy. I’m not hearing very much lately about Trump’s trade policies, critical or uncritical. Is there a union take on the tariffs so far?
A bunch of them put statements about it. The United Auto Workers supports the Mexico and Canada tariffs, and seems most hopeful that there’ll be a coherent strategy that comes out of all of this. I would say the Machinists and United Steel Workers have been most adamant in saying we should separate how we treat Mexico from how we treat Canada. Canada was not a problem as far as wage differentials or union busting, and we have a trade surplus with Canada. The AFL-CIO has been relatively quiet.
For as much Trump can be frustrating, I wonder whether he doesn’t deserve some credit for consistency. You’ve been a critic of NAFTA style trade policy since the ‘90s. He was actually criticizing free trade in the ‘80s. This is not a lark for him. He seems very focused on the trade imbalance, at least rhetorically, and to some extent in policy.
I think there probably is a plan, and the people who know something about trade have that plan. The random on and off tariffs seem to be coming from other places besides the trade people. So we know the Mexico and Canada tariffs that were about fentanyl and immigration came from people like Stephen Miller and Secretary of State (Marco) Rubio. It wasn’t the trade team. The question is: Will there be room for the actual strategic trade plan to emerge? Or will the sporadic, on-again off-again stuff step all over it.
I think we’re looking at a dramatically different political environment on trade policy than we were 10 or 15 years ago. Free trade used to be Republican policy. I mean, it was a Republican (George Bush Sr.) who negotiated NAFTA. Bill Clinton strong-armed enough Democrats to get it passed, but historically on any given free trade agreement, it was all Republicans and then a few Democrats. Now it seems like Trump has overturned free trade as a Republican orthodoxy, and has even pulled Democrats along against it. Obama’s Trans Pacific Partnership (TPP, a proposed NAFTA-style trade deal with the entire Pacific Rim) was sort of abandoned because of Trump threats. And then there’s the sabotage that was conducted against the WTO: Trump refused to appoint dispute resolution panel members, so they couldn’t resolve disputes and the WTO dispute resolution process ground to a halt. isn’t it the case that Biden continued that, and that the WTO has been broken in terms of the way it was intended to work since Trump’s first term?
Well, it’s not that the Democrats went along. Democrats were always the critics. They were the majority of votes against NAFTA, against CAFTA (Central America Free Trade Agreement), WTO.
In the House, yeah.
And in the Senate. I mean, even when the Senate had a bad, lopsided vote in favor of a trade deal, the majority of the nos were always Democrats.
That’s important to remember.
Like (North Carolina Republican Senator Jesse) Helms and (South Carolina Republican Senator Strom) Thurman would vote no, and all the other Republicans would vote yes. And then you would have 30 Democrats voting no, and those things would pass. I mean, there were plenty of Democrats who voted yes on these trade agreements. But in the Republican caucus, it was 95% yes in the House and Senate, and 5%. In the House, it was a little more like 80-20. And then on the Democrat side, it was the reverse.
But could you say that today?
Now, I would say that most of the Democrats remain skeptical. There was always a bloc (of pro-free-trade Democrats). There was the CAFTA 15, 15 Democrats who voted for CAFTA when all the rest of the Democrats voted no, and it passed by one vote. The numbers now that have shifted are more Republicans — because of the politics of Trump. For instance, during the fight over the TPP, the TPP did not become enacted because there are 170 Democrats that said “over my dead body.” But you still needed the next 50 Republicans to say, yeah, we agree. And it was Trump versus Hillary Clinton going into 2016 that helped to shift that dynamic. I think that the political dynamic definitely has shifted. But as much as anything, what’s also shifted is the outcomes of these institutions have really been terrible. And the Democrats clued into it early because they listened to the unions. They were hearing from the unions saying, “these trade agreements are going to destroy us.” Now, everyone out there who’s being honest can look at the results. You mentioned the WTO. You know Trump (trade representative Robert) Lighthizer had the smarts of not appointing those tribunals and putting the dispute settlement system on ice. But one of the few things that the Obama folks did that was actually kind of fair trade, trade justice oriented, is they started lodging protests saying these tribunals are just making shit up. This is not what we agreed to as a sovereign nation. You’re ruling against our anti dumping countervailing duty laws. You’re ruling against our neutral food safety laws. What the hell? I’m like, hello, I warned you about that in 1995!
So they basically had started to lodge protests. And it just took Lighthizer to come up with a clever way to do something about it. But of course, the Biden administration didn’t put the broken thing back. It’s like, this particular machine could eat your house. Let’s put the plug back in? No, they left it unplugged. And the Obama folks should have pulled the damn plug. It shouldn’t have had to wait, because they were already upset about it.
There’s a very good report that Lighthizer had the USTR folks do that charts the history of the overreach of the WTO appellate body. Basically the negotiations to expand WTO got jammed, so the appellate body just started making rules of its own that they couldn’t get countries to negotiate and agree on.
… which was your worst nightmare. Back when you and I were first talking in 1999, there were a couple of cases of WTO overreach — striking down rules on dolphin safety and a few others. What do you think the worst abuses were during the WTO’s functional history?
If you go to tradewatch.org, there’s a table of WTO cases. And what you see is that, basically, if you take a case, the country loses. There’s a whole list: U.S. Clean Air Act regs, U.S. Endangered Species Act regulations, Indian access to medicine rules, U.S. and Canadian clean energy state subsidies, Indian solar policies…. I mean, it’s a wrecking crew or firing squad against public interest policies. The WTO attacked all kinds of fair trade or trade remedy laws. Like, China’s cheating? Sorry U.S., you can’t use your anti-dumping laws. That was probably the thing that finally led to bipartisan support for pulling the plug. But the other thing about the WTO is it had all of these non-trade rules that have exacerbated really dangerous trends. To me, one of the most disgusting travesties is the role that the WTO’s intellectual property monopoly obligations played, and people in poor countries never getting the good vaccines for COVID. And all these Pharma lies: “Oh, they couldn’t make this stuff anyway. They don’t have sophistication.” That’s just horseshit. What they needed was basically a compulsory license, a generic license to make the stuff. They could have been making the mRNA vaccines that saved countless lives in Europe, the US, Canada. There’s a place in Senegal that could make it, Institut Pasteur. There’s a place in South Africa where they make other biologic medicines for HIV, AIDS, etc. It’s not rocket science. It’s a monopoly problem. So that, to me, is outrageous. I think that the WTO rules that forbid Buy America procurement and domestic local procurement to reinvest — taking away that industrial policy tool — are deeply outrageous and have helped deindustrialize numerous countries. I think that the rules at the WTO that are about service sector regulation, that forbid regulation based on size or the number of services provided, which are like anti- antitrust rules in the financial service sector, it’s led to this dire concentration in the food and agriculture sector, where you have like six companies that control 90% of global grain trade. You have three companies that control 80% of seed trade. I mean, it’s a serious, structural, hyperglobalization problem that has led to bad outcomes pretty much worldwide, by the countries that follow the rules. The irony is, the countries that have done well are the ones that blow off the WTO rules — China, Vietnam, etc — or countries that have found places in between where you can basically have beggar-thy-neighbor policies that aren’t directly covered by WTO rules.
So WTO was being pushed back on the Obama era. And then since Trump in his first term demolished the dispute resolution program, the WTO has been basically dead for more than more than eight years. But for all the bluster, if you do a reality check, the trade flows during Trump’s first term weren’t that great, right? Was there any impact on the trade deficit from all of his moves?
Yeah. The bilateral sanctions on China dropped the China trade deficit significantly.
The problem is that there are structural problems that need to be addressed beyond just bilateral trade balances. When you do that (raised tariffs on China), you have what’s called trade displacement. It’s like a squeezing-a-balloon problem. So, yes, our deficit went down with China, but then it went up the same amount and more with Vietnam and Mexico. A bunch of that was just Chinese circumvention or investment in Vietnam and in Mexico by Chinese firms to make it there and send it here to avoid the penalties against China. Then the de minimis loophole meant a lot of stuff evaded the China tariffs. I mean, it’s $40 billion of stuff a year. Most of it comes from China, and it all avoids tariffs.
Earl Blumenauer had hoped to do something about de minimis before he left Congress in January. I don’t know if it was guilty conscience for some of his trade votes. That obviously failed. I was surprised to think that Congress even had raised the threshold to begin with. What was the thinking?
That was like FedEx and UPS, Amazon and company saying, oh, just slip this in here. No one was paying attention to this customs bill in 2015. Even I didn’t really understand the implications of it. It was relatively mundane.
I really appreciate your sharing your policy expertise on trade with our readers. If there’s one message that’s important to get out, what would it be?
That tariffs are a totally legitimate tool, and it’s a big policy and political mistake not to recognize that. In fact, Democrats should restore their initial promotion of balanced trade. All the trade policy tools, they shouldn’t just pooh pooh it because Trump is doing it. However, if you don’t do it right, it’s not going to get the outcomes you want. And here are the things you have to consider. Is it a structural global trade deficit issue or is a bilateral balance of trade issue? And then use the tool appropriately to address each of those things. That’s how I would present the big picture.
