Navigating the Coming Trade Wars
(Clyde Prestowitz, January 22, 2015)
Transcript available below
About the speaker
The New York Times has called Clyde Prestowitz “one of the most far seeing forecasters of global trends.” For more than fifty years, Prestowitz has studied, lived, and worked in Asia, Europe, and Latin America as well as in the United States and has become noted as a leading writer and strategist on globalization and competitiveness. His best -selling books include: Trading Places, Rogue Nation, Three Billion New Capitalists, The Betrayal of American Prosperity and Japan Restored.
Prestowitz was a leader of the first U.S. trade mission to China in 1982 and has served as an advisor to Presidents Reagan, George H.W. Bush, Clinton, and Obama. He has also worked closely with CEOs such as Intel’s Andy Grove, Chrysler’s Lee Iacocca, and Fred Smith of Fedex. In addition, Prestowitz has served on the Advisory Boards of Indonesia’s Center for International Studies and of Israel’s Ministry of Industry and Labor.
As Counselor to the Secretary of Commerce in the Reagan administration, Mr. Prestowitz headed negotiations with Japan, South Korea, and China. Under the Clinton administration he served as Vice Chairman of the Presidential Commission on Trade and Investment in the Asia Pacific Region. He was also on the Board of Advisors to the Export/Import Bank.
Prior to these posts, Prestowitz had a successful corporate marketing career, working for such companies as Scott Paper Company Europe in Brussels, Egon Zehnder International in Tokyo, and the American Can Company.
Mr. Prestowitz holds a B.A. with honors from Swarthmore College; an M.A. in Asia Studies from the University of Hawaii and Tokyo’s Keio University, and an M.B.A. from the Wharton Graduate School of Business. He speaks Japanese, Dutch, German, and French.
Prestowitz’s newest book is The World Turned Upside Down: China, America and the Struggle for Global Leadership (Yale University Press), which was published in January 2021.
Transcript
Robert R. Reilly:
Hello and welcome to the Westminster Institute. I am Robert Reilly, its director. Today we are very pleased to welcome back to the Westminster Institute our guest, Clyde Prestowitz, who is very well known for his trade experience and expertise. Clyde is the founder and president of the Economic Strategy Institute. He is a veteran U.S. trade negotiator and presidential advisor to presidents Ronald Reagan, George H.W. Bush, Bill Clinton, and Barack Obama. He has worked on Asia and globalization for more than 50 years. He was a leader of the first U.S. trade mission to China in 1982 and helped to create agreements that enabled U.S. companies to establish operations in China.
Clyde is the author of many books, including Rogue Nation, Three Billion New Capitalists, The Great Shift of Wealth and Power to the East, The Betrayal of American Prosperity and Japan Restored. His most recent book is The World Turned Upside Down: America, China, and the Struggle for Global Leadership.
Mr. Prestowitz has a B.A. with honors from Swarthmore College; an M.A. in Asia Studies from the University of Hawaii and an M.B.A. from the Wharton Graduate School of Business. He also studied at Keio University in Tokyo. Clyde is fluent in Japanese, Dutch, German, and French. He is joining us today to discuss: “Navigating the Coming Trade Wars.” Clyde, thank you very much for coming.
Let me begin with a provocative quote from President Trump, though many of them are.
Clyde Prestowitz:
Okay.
Robert R. Reilly:
He said last Monday, “Tariffs are going to make us rich as hell. It is going to bring our country’s businesses back.” Is that a realistic expectation?
Clyde Prestowitz:
Well, interestingly, despite much of the nonsense that Trump spouts, there is a grain of truth in that one. We have, really since World War II, worshiped at the temple of free trade, but over the last – well, since that time, but particularly over the last, let us say, 30 years, since the 1990s, the assumptions that we have made about trade and the players in the international marketplace are increasingly wrong.
Particularly, we tried and assumed that if we were nice to China and if we tried to bring China into the free trade sphere, that China would become more and more a free market and a market player. That has not happened. Our assumptions were wrong, and we should have known that they were wrong because we had had experience with other countries along the same lines. So ironically, I mean, I do not think Trump has thought this thing of tariffs through very carefully, and I would be very careful about how and when he does it, but it is not a crazy idea.
Robert R. Reilly:
He made another interesting remark that – and I am quoting him, “Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens.”
Clyde Prestowitz:
Yeah.
Robert R. Reilly:
But I mean, the tariffs are paid by American citizens, not foreign ones, so how would that enrich?
Clyde Prestowitz:
Well, it depends very much on how you do it, of course, but tariffs are a barrier to the sales of foreign products in the U.S. market, so the foreigners are selling us less, and that suggests then that we are making more of what we consume. Now you can argue whether that is beneficial or not, and it is under certain circumstances and it is not under certain circumstances, so you have to be careful about how the circumstances [affect the use of tariffs].
But to put things in very concrete order, America got rich with tariffs. Abraham Lincoln in the middle of the Civil War raised tariffs on steel. All the economists at that time cried and moaned that Lincoln did not know what he was doing, but Lincoln said, well, if I do not have any tariffs, I buy steel from England and I get steel. But if I have tariffs, he said, I get this steel and I also get the money.
So America got rich behind tariffs. Germany got rich behind tariffs. Japan got rich behind tariffs. No country that has gotten rich has done so, except oil producing countries, without tariffs, so the free trade doctrine that we have adopted in the post-World War II era has a lot of flaws and inaccuracies. What Trump is talking about, tariffs, is not necessarily a problem, but it very much depends on who and how you do it.
Robert R. Reilly:
Well, what do you think about what he said about who he is going to impose these tariffs on, particularly Mexico and Canada?
Clyde Prestowitz:
Yeah, that is a very good point. Mexico and Canada are actually the last people on whom we ought to impose tariffs. We do not have trade problems with Mexico and Canada. The industries of Mexico, Canada, and the U.S. are so intimately tied together that it is almost like putting tariffs on ourselves. I mean, General Motors makes cars in Canada and ships them across the border to the U.S. market, so we are going to put tariffs on General Motors? I do not think they have thought that through very carefully, but I think on the other hand countries like China, for example, I can think of some others, but particularly China [should have tariffs placed on their exports]. In effect, China is putting tariffs on us, and so there are many places where we could respond in form.
Robert R. Reilly:
Clyde, what do you mean by that, that China is putting tariffs on us?
Clyde Prestowitz:
Well, let us take what China does.
China for a long time was making panels, electric panels. When China began to make panels, it was a high-cost producer, and we did not impose tariffs. Germany was the low-cost producer at the time. China put up tariffs on it. It did not import any panels from Germany or from us. We and Germany were the low-cost producers, China put on tariffs, and it began to produce panels. It has a very large market, and as it produced panels its costs fell, so today China is the low-cost producer of panels. But it got there by putting on tariffs, and that is just one example of many other markets in which China has effectively done the same thing.
Also, we speak about tariffs, but China is very generous in the subsidies and other economic or financial incentives that it provides to the market, to its producers, which is effectively a tariff. We do not call it a tariff, but subsidies are a kind of tariff, and so I think in the case of China-U.S. economic relationships there is a lot more that we ought to be thinking about in terms of tariffs or other mechanisms.
Robert R. Reilly:
Well, President Trump mentioned putting a 10% across the board tariff on China, I think on 1 February. Is that an effective response?
Clyde Prestowitz:
It would not be. It would not be a terrible move. Actually, I think an about 20% tariff would be effective, and I think that we have to really rethink [this]. In the case of China, we are not dealing with a country like even Germany or France. It is not a truly market economy. It uses market forces in some ways, but it heavily subsidizes, it provides [assistance]. I mean, even the workforce is controlled, where it lives, you know. It is just not a comparable economy.
And China is, I think, certainly aiming to overtake the United States in most of the high-tech areas. I mean, it has said Made in China by 2025, that was the slogan that was manufactured back in 2015. And if you look at where China was in 2015 and where they are today, it is making a lot more of the things in China, so they kind of accomplished the mission. So I think there is a lot that can and should be done vis-à-vis China.
Now, Trump talking about putting tariffs on Canada and Mexico is kind of – I mean, it is nonsense, basically.
Robert R. Reilly:
And also the EU.
Clyde Prestowitz:
Yeah, the EU is a little bit different, but essentially it is the same as Mexico and Canada. We do not have any real problems with the EU. I mean, there are of course always things to be negotiated, but the EU and we are playing essentially the same game. The EU and we are not playing the same game as China, or I mean some of the other developing countries, India, Indonesia; they are playing a different game, not to say it is the wrong game, but it is a different game, and therefore we need to [respond accordingly].
We have assumed that in free trade, everybody will kind of play free trade by the rules. Well, economic development is not necessarily based on free trade. All the world’s countries that are rich got rich not by free trade, and so we have to be more measured and diversified in our trade policy.
Robert R. Reilly:
President Biden was also a critic of China’s policies, and he emplaced some tariffs on them. For instance, last May 14th he imposed the following tariffs: on China’s steel and aluminum 25%, 90% on semiconductors, 100% on EVs and 50% on solar panels.
Clyde Prestowitz:
Yeah.
Robert R. Reilly:
That is since May 14th. What have the results of that been? Was that an effective thing to do?
Clyde Prestowitz:
I think it was. I mean, one result was he put all that package together. Back in the 1980s, the U.S. was the world’s leading semiconductor producer. It was at the leading edge of the technology, and it produced most of the world’s semiconductors. Today we have fallen behind both in the technology and we produce maybe 20% of the world’s semiconductors.
I think that what President Biden did was positive. And in fact, interestingly, the world’s leading edge semiconductor producer, TSMC in Taiwan, Taiwan Semiconductor Corporation, has taken the lead in the technology. Interestingly, as a result of Biden’s pressure and incentives, TSMC has built a fab in Arizona, and it turns out that the Arizona fab is more productive than the fabs in Taiwan, so this I think is a great accomplishment of Biden’s policy, and Trump ought to continue the same policy.
Robert R. Reilly:
I wonder what price advantage Arizona would have over Taiwan in producing these.
Clyde Prestowitz:
I do not know exactly what the cost breakdown is, but the key point is that the production is more efficient, apparently, in Arizona than in Taiwan for that product. That is not across the board, but for the particular product they are making. I mean you have to understand that wages are not important in semiconductors. You know, the labor cost is almost nothing, it is capital and technology, and apparently TSMC has put good capital and good technology in Arizona.
Robert R. Reilly:
Clyde, when President Trump gives his rationale for increasing tariffs on Canada and Mexico, the reason he gives for doing that is not an economic one, it is a political one. He says uncontrolled traffic in fentanyl coming across the U.S.-Mexico border.
Clyde Prestowitz:
Yeah, well, I mean that is nonsense. The tariffs are not going to affect, not going to have any impact on uncontrolled cross border crossings.
And you know, it is so funny, I am living in Reno, Nevada right now, and I have an acquaintance who voted for Trump, but he has an illegal Mexican guy working for him, and the illegal Mexican has brought his wife who is pregnant from Mexico so that the child will be born here in the U.S. A tariff is not going affect that.
Robert R. Reilly:
Well, I think he wants to use the tariffs as a bludgeon to get Canada and Mexico to increase their border controls and stop the flow.
Clyde Prestowitz:
Well, that maybe he maybe that is it, but I think it is a very crude weapon. There are better weapons.
Well, I mean, really Trump has made a big deal out of the illegals and the crossings, but here in Nevada – I mean, if you got rid of all of the [illegal immigrants], if you immediately picked up all the illegal Mexicans who are working here and sent them to Mexico, the Nevada economy would collapse. A large percentage of the people here are illegal, and that is true in other states, and you know we have tried to address this problem before, in both Republican and Democratic administrations, but we have not yet come up with a real solution. And Trump is just using clubs that are likely to be more destructive than productive.
Robert R. Reilly:
What authority does he have to do these things?
Clyde Prestowitz:
That is a good question. I mean, Congress, of course, does make the laws, and Trump cannot just declare [laws]. We will see how that works out in the Congress. I mean, the Republican majority in the Congress is very slim, and you know it is not going to be just a matter of Trump saying let us do this, let us do that.
Robert R. Reilly:
How will the Customs Service respond when President Trump gives an order like that? Would they just say you do not have the authority for that, or you need Congressional approval?
Clyde Prestowitz:
I am sure the Customs Service will respond. To the extent that they can respond under the law, they will, but as you point out, the laws are made by Congress, not by the President.
Robert R. Reilly:
Speaking of which, when the president talks about tariffs on Mexico and Canada, Congress passed the current trade agreement affecting Mexico, Canada, and the United States. That received the largest bipartisan support in the US Congress of any trade agreement in history.
Clyde Prestowitz:
Exactly. Exactly.
Robert R. Reilly:
So what changes would he attempt to make that would gain that kind of bipartisan support?
Clyde Prestowitz:
Now look, I have no idea what changes he has in mind, and I do not think he does either. He is a demagogue. He is using Canada and Mexico as whipping boys, emotionally, to appeal to the fears and prejudices of the American public, but his ability to actually do something legally is – again, you go back to the Congress. Congress has to pass laws, and then the Supreme Court can – if Congress passes laws that are unconstitutional, the Supreme Court will knock them down, so we have a government of mixed powers. Trump is not a king or a dictator, although he may like to be one, he is not.
Robert R. Reilly:
Yes, well, which leads some to say that President Trump is using this kind of rhetoric as a negotiating tactic.
Clyde Prestowitz:
If he is, it is a bad tactic.
Robert R. Reilly:
Why?
Clyde Prestowitz:
If I were the President of Mexico or the Prime Minister of Canada, what Trump has been saying would not make me feel like I wanted to sit down and talk with him or accommodate him in some way. It would be just the opposite. I would try to figure out how it could make life difficult for him.
Robert R. Reilly:
Well, in fact, that is what the Canadians, certainly, and the Mexicans are saying. They are looking at how to retaliate.
Clyde Prestowitz:
And I mean, look, you know, the governor of Texas screams about illegals, but do you know where the cartels in Mexico get their guns? They get them from Texas. Why does the governor of Texas not crack down on gun sales? I mean, this is so hypocritical, this whole game of blaming Mexico when most of it is our fault.
Robert R. Reilly:
Well, I it does seem to threaten to disrupt some of the most productive trade relationships that the United States has, with our immediate neighbors and with European countries. I mean, Clyde, you know Japan like the back of your hand. we do not hear it mentioned in any of these [discussions].
Clyde Prestowitz:
No, interestingly and nicely since it was so much of a target for so long. Nippon Steel made a bid to buy U.S. Steel. In my view that would have been a win-win for everybody. U.S. Steel is a sick company. Nippon Steel is really alive. Nippon Steel makes steel cheaper and better than U.S. Steel, and Nippon was careful to make concessions and set the deal up in such a way that they were not going to be hurting the workers or taking steel production out of the United States.
I thought it was a brilliant idea, but the steel workers, the U.S. Steel Workers, did not like it because at the moment the U.S. Steel Workers have a huge influence on the corporate policies. And you know, Nippon was going to probably make the atmosphere or the environment maybe a little bit less accommodating to labor, or labor thought that they might be, and so in my view we missed a good opportunity to improve U.S. steel production, both in terms of quality and capacity, because the U.S. Steel Workers shot it down.
Robert R. Reilly:
Clyde, obviously the problem child is not Canada or Mexico, it is China. Can you speak of how other countries, principally Japan, say, or other Southeast Asian countries deal with the same kind of predatory practices in which China engages?
Clyde Prestowitz:
Sure. Let us use Japan as an example. So Japan is a country in which the industrial structure and the industry-government relationship is quite different from the U.S. The Chinese have less ability to go into Japan and to make acquisitions or to scoop up information than they have in the United States. And then secondly, the Japanese have invested and have production facilities in China, and they have been able to accommodate China in a lot of ways. It is much it is much easier for the Japanese to make tacit back room negotiated agreements, both among themselves and with the Chinese, than it is for the U.S.
The U.S. is a more by the book and open, transparent to the public, and therefore it is more difficult in the U.S. to kind of make tacit agreements one way or the other.
Robert R. Reilly:
So you think Japan gets a better trade deal than the United States?
Clyde Prestowitz:
I would not say that they get a better trade deal, but they take care of themselves better, and this is where, you know, in Japan the cooperation between industry and government is much more sophisticated that it is in the United States. You know, American businessmen pound their chest and say we do not like big government. They come running to big government when they feel that they need some help. But in Japan, government and business are working together all the time. It is much more of a well-oiled machine that in the U.S.
Think about it this way. Let us take Korea. Korea sells a lot of cars in the United States.
I mean, Korea is one of the major car producers. You would think that it could sell cars in Japan. Well, there are not any Korean cars in Japan. Why is that? Do the Japanese do have some kind of tariffs we do not know about? No, the Japanese do not have any tariffs on cars, no restriction on cars, but Korean cars are not sold in the Japanese market. And there a lot of societal and cultural reasons for that, but the Japanese market is just much more difficult to penetrate by foreigners than the U.S. market.
Now, mind you, there are not a lot of Japanese cars sold in Korea, but I think something to keep in mind is that these countries are all either developing countries, or they are close enough to their period of development that they remember it. And they know that if you want to develop an industry domestically, it is very hard to do so if the market is completely open to foreign producers who are more advanced than you. You are trying to catch up. The Asians are just more subtle than the Americans.
Robert R. Reilly:
Clyde, there is another issue that has received a lot of attention, and that is the size of the U.S. trade deficit, which is well over a trillion dollars.
Clyde Prestowitz:
Yeah.
Robert R. Reilly:
Is that a problem?
Clyde Prestowitz:
Yeah, it is a big problem.
Robert R. Reilly:
It is certainly presented as one. And could you describe the nature of that problem?
Clyde Prestowitz:
Well, it is a problem in a lot of respects, both short-term and long term. It arises because the dollar is overvalued. The overvaluation of the U.S. dollar feels good. If you are an American and you go to London or Paris or Tokyo, and the dollar buys a lot, what do you really feel? You like that, but what it means is that we are continuing to go into debt, international debt.
Robert R. Reilly:
Why so?
Clyde Prestowitz:
Well, because we are spending more than we are producing and selling, so we effectively borrow money to continue the spending. So if you look at our international debt – I mean, think about this: in 1980, we had almost no international debt. Today, it is huge.
Unfortunately, the international monetary system is set up such that it kind of depends on the dollar, and the dollar ultimately depends on us buying a lot of stuff, and so it is kind of a vicious circle. And ultimately it is going to be unsupportable, but you know there are a lot of vested interests, and the interests will resist a dollar revaluation or a change in the monetary system until it is absolutely necessary.
Robert R. Reilly:
The BRICS countries have had discussions about starting their own currency.
Clyde Prestowitz:
Yeah, the BRICS say that they do not like the dollar system. The dollar being the global reserve currency they feel puts them at a disadvantage, but they do not have a real solution to that. Their own currencies are not strong and are subject to manipulation, and the countries themselves, while they are striving to develop, most of them are irregular in their financial dealings, so I think that they are kind of pointing to a real long-term problem, which is that the dominance of the dollar cannot last forever, but it can last for quite a long time, and we do not have a good alternative.
Not only we, the United States, but we the world do not have a good alternative to the dollar as the reserve currency. You cannot go back to gold. So this is an issue. I would hope that the Trump administration would try to address the problem of the dollar as the reserve currency and develop a more accommodative international financial system, but the words coming out of Trump’s mouth do not point in that direction.
Robert R. Reilly:
Well, what would that look like, Clyde?
Clyde Prestowitz:
Well, you know if you go back before World War I, everybody was on a gold standard and no national currency was dominant.
Robert R. Reilly:
Not the British pound?
Clyde Prestowitz:
Well, I mean the British pound was important, but gold was the standard. The British had to deal in gold when they did certain transactions. Or if you go back to Bretton Woods when the current system was set up and John Maynard Keynes wanted to have bancor. He wanted to have an international currency called bancor. That would be an international currency, and no country would kind of dominate the financial system.
Harry White, the U.S. Treasury representative at Breton Woods, opposed that for a lot of reasons, but primarily because the dollar was king at that time, and it had great advantages for the United States for the dollar to be king. But in the long term, Keynes was right, in my view, I think. And the IMF has struggled. They have special reserves, which is kind of an international currency, but it never became effective. And at some point, I think that the IMF is going to have to deal with a shift from the dollar to something more international than the dollar.
Robert R. Reilly:
It seems that the advantages that obtained to the United States from having the world reserve currency are being squandered in the sense that what certainly is not sustainable is a government spending that so far outstrips revenue that inflation is a certainty.
Clyde Prestowitz:
Yeah, well, for all those reasons. I mean, again, if you look at U.S. international debt, it has mushroomed, coming from practically zero in 1980 to what it is today, [29% of the national debt], it is huge, so that means we owe foreigners, we are paying out to foreigners all the time. And you cannot do that indefinitely.
Robert R. Reilly:
In the past when some of the economic troubles the United States has, which it seems unwilling, politically unwilling, to address through the necessary reforms, the response comes that, well, our economy will have to grow itself out of these problems, that in other words economic growth is going to solve some of these things.
Clyde Prestowitz:
Well, but you know there is the problem. How can you get economic growth when you import everything that you [need], all the vital or a large number of the vital products that you need? You cannot get growth if you are only buying. You have to produce something and sell it, and you have to sell it in the international marketplace.
Robert R. Reilly:
Well, presumably that is one of the reasons why Trump is so pro tariff.
Clyde Prestowitz:
Well, and tariffs can play an important role, but you have to have a tariff system that is designed to achieve what you want to achieve. I mean, putting tariffs on Canada and Mexico is not going to make it easier to produce in the United States.
My example of General Motors [underscores this point]. General Motors makes cars in Canada, they make them in the U.S., and they are kind of interchangeable. If you say okay, you cannot bring in cars from Canada, then what do you do for some of your critical elements? So tariffs is a dangerous word.
Tariffs can be useful. I support useful imposition of tariffs, but you have to be sensible. What is it you are trying to achieve? You want to punish somebody, or do you want to stimulate American technological development, American production, and reduce the U.S. trade deficit? I think you should do the latter.
Robert R. Reilly:
Well, the effect they seem to be having is to scare people. It scares some countries which are our allies, and it worries many that should these tariffs be used as a kind of blunderbuss, it could start a trade war, which would have the effect of reducing economic growth for everyone.
Clyde Prestowitz:
Yeah, I mean, part of the reaction is that in some ways foreign countries benefit from the strong dollar. In other words, companies like Apple, for example, do not produce in America any longer. They produce in various places around the world, so the countries that are receiving Apple’s investment to produce things, and because they are producing things, Apple is transferring technology to them, they like that, and so when you mention tariffs, they immediately say oh god, we are going to lose this.
But in the long run if the United States is increasingly indebted, it is not going to be able to be a great market, it is not going to be able to spend on R&D to improve its own productivity, so in the long run this is not a winning strategy. But I can understand that countries that are kind of comfortable with how things are working at the moment get scared when you talk about dramatically changing it.
Robert R. Reilly:
Clyde, this is a closing question. Can I ask you whether you are generally an optimist in terms of the U.S. economy?
Clyde Prestowitz:
I guess that is a laugh line, right?
Well, I mean, I am kind of an optimistic person, and I do think that there is a reasonable chance that these problems can be solved, but I have to say that the older I get, the less optimistic [I am]. Maybe that is just an aspect of getting old, but no, I am really worried by the Trump policy so far.
Robert R. Reilly:
Well, what about the appointments or the nominations he has made for key positions, Secretary of the Treasury, U.S. Trade Representative, and that kind of thing? Does that ameliorate any of your worries or increase them? Are you familiar with some of these nominations?
Clyde Prestowitz:
I am skeptical of a lot of the appointments, and I feel that Trump obviously likes to gather power around him, and he has named as appointments – there are some good appointments. I think Rubio at State is a good appointment, but there are just a number of appointments that are puppets [who are] not qualified for the jobs, in my view, and it bothers me.
Robert R. Reilly:
Well, I am afraid we have run out of time, and I would like to thank our guest, Clyde Prestowitz, who is the president of the Economic Strategy Institute, for joining me today to discuss the issue of tariffs and [the] possibility of trade wars.
Clyde Prestowitz:
Good to be with you. Thank you.
Robert R. Reilly:
Thank you, Clyde. And I invite our viewers to go to the Westminster Institute website where you will find a number of other programs that we have recorded and for which we have transcripts, including one from a couple of years ago with our guest today, with Clyde, so we hope you will take a look at the riches we have on offer there. Thank you for joining us today. I am Robert Reilly.