As Deals Come Together, What’s Next for Tariffs and Trade?

Steve Odland: Welcome to C-Suite Perspectives, a signature series by The Conference Board. I'm Steve Odland from The Conference Board and the host of this podcast series.

And in today's conversation, we're going to talk to Erin McLaughlin, the senior economist at The Conference Board in the Economy, Strategy & Finance Center, and we're going to talk about the trade and tariff landscape and what should senior executives be thinking about today? Erin, welcome to the program.

Erin McLaughlin: Thank you for having me, Steve.

Steve Odland: So Erin, this changes just about every day. This has been going on for months and months and months, but just give us an overview of where the tariffs stand, and with what countries now do we have verbal agreements, and what are they and so forth, and what's still in flight?

Erin McLaughlin: OK, excellent. So as I'm sure our audience knows, Liberation Day was back in early April, and the deadline had sort of kicked forward 90 days and then a little bit, and then we had a little extension after that. So we were under an August deadline, essentially, for a lot of countries that were on the list, and we have seen a lot of framework style deals get made during that time.

So almost every trading partner that's a major trading partner, we do have some sort of framework deal made with three key exceptions. And those exceptions are: China, which we're now looking towards a November deadline. And Canada and Mexico also are sort of on a different track than the other countries. So our tariff rates and, of course, the status of the US-Mexico-Canada agreement, which will most likely be renegotiated next summer, or that's the next deadline for that—those three are sort of up in the air. But for most of our other trading partners, we've seen some framework deals done.

Steve Odland: So basically, we've got the EU in place. The UK's in place, Japan, several countries in southeast Asia, some of the South American countries. So it covers most of it. And two of our biggest trading partners, of course, are Canada and Mexico. And that USMCA framework remains in place, and so therefore—what is it, something like 87% of all of the trade between the three countries is not affected by this overlay?

So it feels, I mean, tell me if you disagree, but it feels like we've got at least general direction here on what's going to happen?

Erin McLaughlin: Yes, I think that we have seen the impact from inflation not be as blunt as we expected right away. And there's probably a few different reasons for that. But one is sort of the delays and the uncertainty. So maybe it just hasn't passed through to the consumer yet. But yes, for Canada and Mexico, who are our—Mexico is actually our largest trading partner. They became our largest trading partner a couple years ago, followed by China, followed by Canada. So that's the order it now goes in.

And so with China, we have a 30% baseline tariff on our imports from China, but yes, for Canada and Mexico, most goods, roughly 87%, give or take, are covered under USMCA. And so we have not seen a lot of tariffs necessarily on those. Now the big exception are these sectoral tariffs on specific products or materials, and those are the ones that have been invoked under the Section 232 national security concern that is often referenced.

Steve Odland: When you hear the administration talk, they frame the tariffs in, I guess, kind of two buckets. One is that they want more level trade, and they want manufacturing brought back to the United States. But the other thing is they want this source of revenue. And recently, the Treasury secretary has said that their initial estimates of $300 billion a year in tariffs is way too low, and it's going to be quite a bit higher, although they haven't put a new number out there. But it seems like there's a dual objective here. Am I hearing that correctly?

Erin McLaughlin: I think you are. I personally think the main objective is that the fact that the American consumer still has the most power in the world of any consumer, and that deals can be struck based on that, is still probably the primary reason that we're seeing for these tariffs, and certainly the revenue collection. In our estimates, that we ran in our model back after Liberation Day, put it at over $400 billion. And so I think the collection is certainly on pace with what it was going to be.

Now there's just not a significant amount of money to offset the federal deficit and our federal spending. So we don't want to make it sound like this revenue that's coming from these tariffs is somehow going to sort of cure some of our federal budget issues. It will not.

Steve Odland: Well, I mean, but—

Erin McLaughlin: But.

Steve Odland: $400 billion is a lot of money.

Erin McLaughlin: It is.

Steve Odland: There's a $2 trillion, roughly round numbers, $2 trillion deficit annually on a $5 trillion spend. They're talking about making about a trillion dollars’ worth of cuts. This would be, if it's $400 billion in tariff revenue, that helps get really close to a more sustainable level of annual deficit.

Erin McLaughlin: This is true, yes. And our model may take into consideration some consumer dynamics, and I think that's really what we have to pay attention to is: Do these tariffs make consumers not want to spend? Or are there certain categories such as steel and aluminum, when it comes to appliances or automobiles? I think it will be interesting to see over the next few quarters if we see a reduction in consumer spending because of the tariffs, and my guess is that some of it will be because of some of these really high sectoral tariffs.

Steve Odland: Now let's talk about those sectoral tariffs. You mentioned steel and aluminum. There's also copper and, they call these so-called "umbrella of fentanyl" tariffs. It's not tariffs on fentanyl.

Erin McLaughlin: Right.

Steve Odland: It's tariffs around the illegal import of fentanyl. But why did they choose these specific sectors? They're obviously raw materials or inputs into manufacturing.

Erin McLaughlin: Well, these sectors were chosen in large part to encourage the domestication of the markets for these materials. And certainly, and Steve, as you know, I co-authored a critical mineral series recently with my colleague Alex. And so we know that we do have a lot of these critical minerals and rare earth in the US, under the US, in our underground, but it does take years to get them. And we do not have the kinds of mining and manufacturing of critical minerals compared to China and many other countries.

But I do think that the tariffs on these are to encourage the exploration in the investment that it will take to get these critical minerals in our domestic sphere. And there is a national security issue related to having access to some of these critical minerals and materials.

Steve Odland: Yeah, so a lot of reasons around this, the strategy of tariffs, which is unusual in the modern era. I mean, we haven't seen this since the '30s. Now you mentioned that we haven't seen a lot of inflation yet from this.

And it is interesting, when The Conference Board surveys its members as to how they're handling it, most of them have not yet passed it through to the consumers. They're either pushing it back up through the supply chain, trying to have their suppliers eat the cost, they themselves, the manufacturers themselves are eating some of the costs, lowering their margin, but that can't go on forever.

So at some point here, it feels like they're going to start passing this through, in which case it's going to hit inflation. And we are forecasting that, right?

Erin McLaughlin: We are, yes. Absolutely. The other reason, I think one of the major reasons it hasn't been passed on is because so many retailers have pulled their inventory forward, and that actually impacts the GDP calculation, and can muddle the economic data that comes out. You know, different sort of freight estimates. And when we look at cargo that's come into the different ports and how the deadlines for these tariffs have moved, we've seen that importers into the US took in a great deal of goods ahead of the original April deadline, and then subsequently, as these deadlines have pushed.

In fact, July was the busiest month ever for the Port of Los Angeles on record. They took in the most containers ever, and they are the largest port in the United States. So really, for a lot of retailers in the US, they would right now probably be bringing in the last of their holiday inventory. And most analysts think that the inventory is already here and maybe even has been here for quite some time, and that there might be the ability for very little impact to be seen by consumers through the end of the year if the inventory is already on hand.

Steve Odland: Well, and you know this also is supported by the data on the cost of containers. And since July, the cost of containers have come down, meaning they're more plentiful, meaning that the shipments are not as plentiful post-July. But most of the holiday sales items need to be here by midsummer. That's just normal timing.

But it is true that the supply chains have frontend-loaded the lower-cost goods. You saw that pre-April implementation of the tariffs. So then the question is, now what? Cause you can't, as you said, you can't just turn on this manufacturing. It takes years, and depending on what we're talking about, if you're talking about chips, it can take almost a decade. If you're talking about mines, it can take a decade to get the manufacturing or get the production back in the United States. So this is a long-term process.

So therefore, The Conference Board is projecting that inflation should rise. Talk about the forecast on that.

Erin McLaughlin: Yeah. We are forecasting that inflation will rise, particularly in Q4 and then through the first half of next year, potentially slowing our economy by almost a percentage point in GDP. We're not calling for a recession, but we are seeing that inflation could go above 3% in those quarters in a few quarters out.

And so it will be really interesting to see, I think when you think of trade and what's coming in, we've sort of talked about that holiday inventory. I think where consumers are going to start to see it are with those sectors that we've already talked about. We're seeing it already with appliances and things related to stainless steel metals and somewhat with automobiles.

But I think we're also going to see it more immediately with some of these random things, like coffee and chocolate, that sort of are unique to certain countries, right? We get a third of our coffee beans from Brazil. We get quite a bit of our chocolate from Europe and Switzerland, and so there may be some sort of commodity-level impacts that we'll see between now and the end of the year.

Steve Odland: Yeah. Now that then puts pressure on the Fed, because the Fed is looking at these numbers and saying, OK, if there's going to be an increase in inflation here towards the end of 2025 and into 2026, it makes it harder for them to cut the discount rate.

Erin McLaughlin: Right.

Steve Odland: And The Conference Board is projecting only one rate cut here, in December, towards the end of this year. But it puts pressure on it, cause the job market's holding up. And so therefore they're trying to keep to both mandates of making sure that inflation is in check and that there's a healthy job market.

Erin McLaughlin: Exactly, yes. The Fed has two mandates. One is related to employment, stable employment, and the other one is related to stable prices. And so sometimes there's a conflict between the two of those, and sometimes there's a lack of clarity. And this Fed is very data-driven. That's what they've said. Unfortunately, a lot of data looks backwards. It doesn't look forwards. And so, the Fed is seemingly taking a bit of a cautious approach, assuming that inflation will rise as a result of tariffs.

Steve Odland: We're talking about tariffs and trade, and we're going to take a short break and be right back.

Welcome back to C-Suite Perspectives. I'm your host, Steve Odland, from The Conference Board, and I'm joined today by Erin McLaughlin, the senior economist at The Conference Board in the Economy, Strategy & Finance Center, and an expert in all things trade.

How many pieces, Erin, have you written in the past year on trade and tariffs? My word.

Erin McLaughlin: I think I have written around 30. And as you know, we had our Navigating Washington series, which involved an expert at The Conference Board blogging every single day. And I took on that mantle for the ESF group regarding the tariffs. So it has been a very busy few months.

Steve Odland: And we have a Tariff Tracker, which is real time and up to date, and they can find all of your writings and that Tariff Tracker at TCB.org, that's The Conference Board, TCB, at org, and they can click on the ESF Center, Economy, Strategy, Finance Center, and Erin's work is all there for you.

Let's go back to something you talked about China being a great exception to what's going on here. But India is also an exception, and that's all tied into more of a geopolitical situation rather than a trade situation with China, India, and Russia. Talk about how that triumvirate is different than some of these other trade issues.

Erin McLaughlin: Right. So it's very interesting. India, which seemed to be one of the last countries to get a lot of attention during this last phase of trade negotiations. The administration had come to terms with Vietnam, South Korea, Japan. And India was sort of hanging out there with a 25% baseline tariff. And then, they had another 25% added on because of their purchasing of Russian oil. So right now, the India tariff rate, the rate for us on goods from India is at 50%, and that puts it at the highest of any other country except for Brazil, which is also at 50%.

So what's interesting about India, as well as Vietnam, which is one of the first countries, earlier this summer that the administration struck a framework with, is that those are two countries that saw a lot of benefits from our winding down from imports from China over the last five or six years. So our trade with Vietnam and our trade with India has increased substantially.

And you know, we do get different things from those countries. India, for example, a large percentage of our ingredients related to generic pharmaceuticals comes from India. So my understanding is that they still want to negotiate and are in negotiations, but that tariff is at 50%.

Steve Odland: Yeah. And so they were the beneficiaries of this supply chain diversification strategy.

Erin McLaughlin: Right.

Steve Odland: But this is also a geopolitical penalty, if you will, because they're not following some of the administration's desires around trade with Russia. And the reason for that is because they don't want Russia to have the raw capital, the cash, in order to then fund the war in Ukraine. So there's all these interlocking issues, and so tariffs and trade are being used in order, as we said earlier, in order to sort of level the playing field in some cases. But in this case. It's very different.

Now, also, some countries have had retribution against the United States' tariffs, so talk about those countries and what the reciprocal tariffs have been.

Erin McLaughlin: It's interesting, there were many threats of reciprocal tariffs earlier this spring, and when a lot of these tariffs were first announced or were first really in the news, but we have not seen a lot of reciprocal tariffs come into place, maybe with the exception of Canada, and again, it's on goods that are not related to the US-Mexico-Canada trade agreement.

So I think some of that is because Canada was taken by surprise and because they're very, very surprised that, given our close relationship historically, that there would suddenly be tariffs at all on any of their goods. And so, the effective tariff rate for us is hovering about 18%, but the rest of the globe is not necessarily trading at that tariff rate, and we have not seen the kind of reciprocal rates on US exports, right now, at what we thought that they would be earlier this year.

Steve Odland: So let me make sure I understand that. So historically the US tariff rate, just averaged across things, it had been about 2.5%.

Erin McLaughlin: Yes.

Steve Odland: Now effectively, at this moment, with everything still shifting, it's at 18. So that's really, really big. Really different than our trade stands before. But part of the reason is that other countries’ tariffs on the US were quite a bit higher than the 2.5%, right?

So , you have this dynamic going on. So then the question comes back to strategy, which you articulated earlier, and we don't know for sure because we're not sitting in the administration, but it appears to be a negotiating tool in order to get to more favorable trade agreements. But do you think, and do you hear that there will be this base tariff rate of, I don't know, 10%, that we're going to settle at regardless of whether we get great trade agreements done around the globe?

Erin McLaughlin: I have not heard that. I think what we're going to see is a lot negotiated around export and import controls. And so, as you said, many other countries, maybe they didn't have a quote-unquote flat rate for US goods that were being exported into their country, but they had a lot of controls around what they would allow. And so it seems that one thing the administration is really focused on is striking deals with these individual nations to try to get them to loosen their controls, whether it's importing our automobiles, our agricultural goods.

And then in exchange, maybe—and that's what we're hearing with some of the frameworks as they're being developed—also allowing a certain percentage of, say, automobiles or steel and aluminum goods into our country. Not at the high sectoral rates, but at lower rates. So I think as these negotiations continue and as these frameworks develop, it will be less and less about flat rates and more and more about export-import controls and more and more about specific materials and commodities.

Steve Odland: You have to kind of go back in history a little bit to try to understand how we got to where we are. Post-World War II, there was intended to be a liberalization of trade and more of an integration of supply chains and trade in order to keep the peace. Because part of the issue that led to World War II was the isolation of Germany and the Axis Powers, and they weren't allowed to trade with the West, and hence they were very poor, high inflation.

And so after World War II, there was the general agreement on tariffs and trade, the so-called GATT, which was created in '48, and it was updated in 1995 with the creation of the WTO, the World Trade Organization. And so now this feels like phase three, if you can call it that, Erin, but it's a whole new era post-GAT and WTO.

Erin McLaughlin: It's a whole new era, and you know, I'm a transportation nerd. So I think one of the other things besides the agreements that sped up everything was the actual containers. We didn't use containers until after World War II, and we didn't have sort of the continuity with ports and trucks and rail cars all having the ability to ship using containers until between the '50s and the '70s, when that really became super-commonplace in the US and globally.

So, we've just had so many different markers of advancement over the last 30 or 40 years. And certainly the US consumer has benefited in large part from globalization, because we were able to buy a lot of goods that are at cheap prices. But there's, on the other hand, we've seen the decimation of a lot of our large-scale manufacturing. And so one thing that I think that is good that will come out of this is that we will be able, at this point in time—when smart and advanced manufacturing is so important with regards to us looking towards the future where chips and critical minerals and materials and other things are necessary—that the US needs to put itself in the best position possible to be part of the next era of manufacturing and of globalization.

Steve Odland: Yeah, and most of what we've talked about here have been tariffs on goods and trade on goods. There's a huge trade in services, right? And we do have a trade surplus in services with the EU and other areas. Talk about how all of this affects services, and are there tariffs on services and so forth?

Erin McLaughlin: The services have largely been left out of the conversation. A lot of the focus has been on goods, as we know, and a lot of the focus has been sort of on the back and forth of goods measured on a country-by-country basis.

But yes, the US has a services surplus. We export our services globally, and in large part it's because we are seen as leaders particularly in the digital economy, and of course in professional services, as well. And that's very, very important for us to be able to continue doing. There are different countries that sort of treat that differently, and part of, I think, future negotiations that I see will be around potentially those services and sort of the digital services tax and other taxes that we've seen that are also part of these trade negotiations.

Steve Odland: So if you're sitting in a C-Suite today, what, what should you be looking at coming down the road? What are the key dates? What are the key decisions to be made? Where are the pivot points that you know from a business perspective they need to focus on?

Erin McLaughlin: Well, I think if you're in the C-Suite, it really depends on the industry and the business that you're in, obviously. So there are going to be, if you're in the goods business, you're in the retail consumer business, that's one thing. If you're in a services business or a digital business, that's certainly different. But I think there's a couple of things, if I put myself in that position, and as we advise our members on these things.

One is, which is very micro is to really take a hard look at your supply chain. See if you can use foreign trade zones and bonded warehouses, which gives some flexibility here in the US with regards to your goods. And those are things that companies are now looking at. I recently wrote a paper, an article that sort of talks about foreign trade zones. And so, these are areas, usually within a hundred miles of a port, where you can potentially take in goods and pay the tariff later or not, or pay a lower tariff, or sometimes not even pay a tariff, if you are holding or manufacturing your goods within foreign trade zones, or if you're holding goods within a bonded warehouse.

So I think that's one thing. Second thing is when the dust settles a little bit, and we have a better understanding of the level of tariffs on different countries, is to see if there's room within your supply chain to diversify and perhaps import from countries that have lower tariff rates, or considering onshoring. And of course, it does take many years to build a factory. But there are certainly possibilities around that.

And then lastly, we've seen in some of the most recent bills that passed and some other legislation that there are incentives around depreciation and other tax incentives regarding onshoring and the treatment of these goods for US companies. And so there's hopefully some advantages there that the C-Suite can potentially look to that maybe weren't available previously.

Steve Odland: All right. That's great advice, as always. And again, all of your materials are at TCB.org. And just look under the Economy, Strategy & Finance Center for all of our advice and insights, trusted insights for what's ahead.

Erin McLaughlin, thanks for being with us today and sharing all of your insights on tariffs and trade.

Erin McLaughlin: Thank you, Steve.

Steve Odland: And thanks to all of you for listening to C-Suite Perspectives. I'm Steve Odland, and this series that's been brought to you by The Conference Board.