I'm Scott. I'm Bill. And we're the Trade Guys. We're listening to the Trade Guys, a podcast produced by CSIS, where we talk about trade in terms that everyone can understand. I'm Alex Kisley, and I'm here with Scott Miller and Bill Reich, the CSIS Trade Guys. Thanks for listening to the Trade Guys. On today's episode, we discuss President Trump's threat to impose a 100% tariff on Canada. Then, the Trade Guys give their takeaways from a busy week in Davos and take a look at recent proposals to reform the World Trade Organization. All that and more on today's Trade Guys. Well, hello to all of our listeners from a bitter, cold, and snow-covered Washington, D.C., though perhaps it's a little better down in North Carolina, Scott, or no? It is a little better. Conditions were worse both north and south of us. We were in a band where we got some ice, but not much else. And so we were fortunate. We are covered in ice in Washington and the roads are awful. Bill and I were just lamenting how bad our drives have been over the past couple of days. It's been pretty miserable here, but no end in sight. So I was talking with my parents down in Florida. They're expecting flurries this weekend, of all things. So it seems like nobody's being spared from this. Well, good. Florida deserves snow. No place better to send it. It would be great. It's an apocalyptic scene down there. But we need the TikTok videos from Florida snow. That's right. Driving in the snow. I have no doubt we'll get that. It'd be awesome. All right, guys. Well, let's get into it. We spent part of the show last week talking about Canada's relationship with China, and we're going to pick right back up there again today. On January 24th, President Trump threatened Canada with 100% tariffs on all goods coming into the United States if Canada moves forward with its trade agreement with China. and treasury secretary beset in the past few days said during an interview with cnbc quote i would just encourage prime minister carney to do what he thinks is best for the canadian people not his own virtue signaling because we do have a usmca negotiation coming up and i would not pick a fight going into usmca to score some cheap political points so bill i'm having whiplash here correct me if i'm wrong but didn't trump just a week or two ago say that canada should pursue agreements that are in its best interest when asked about the Canada-China talks. So why the sudden reversal? Is this nothing more than a negotiating tactic around USMCA or what's going on here? He pivoted. And I wouldn't say that Canada's the only country that's focused on scoring political points these days. The United States is known for it as well. But yes, Trump started out saying that's what he should be doing and then reversed himself a few days later. I think he began to think about it a little bit. it's pretty easy, I think, to see why Carney did it. On the surface, it's simply an implementation of what he's been saying and what we've been talking about week after week on the podcast, which is that the U.S. signal is that we're not a reliable trading partner anymore. So the obvious conclusion for other countries is find other partners. And Carney has been very clear in saying that he wants to reduce the Canadian dependence on the U.S. economy. You know, three-fourths of their exports come here, almost half of their imports come from us. And so he's trying to change that. And China is an obvious place to go. There's also a kind of a foreign policy reason, too. The Canadian-China relationship has been in bad shape for a number of years, ever since they detained the Huawei executive at the U.S. request during the Biden administration. And the Chinese are retaliated by detaining the two Michaels, the two Canadian citizens, that's water under the bridge. But the relationship needs patching up. And I think one of the reasons Carney went there was to do that, but also genuinely to try to establish other avenues for Canadian trade, because we'll be talking about this in a few minutes, but his speech at Davos talks about a rupture in the international fabric. And clearly, there's been one in US-Canada trade relations. So, you know, he's doing the logical thing. It's also about USMCA, which I'll get to in a minute. But the other thing that's intriguing about it, and we've had other examples of this before, is it turned out to be, in its own little way, a surprisingly conventional deal. The headline item was they traded canola seeds for cars, and the Chinese reduced their tariff on canola seeds. I told Alex this, I learned, Canola actually is a portmanteau word for Canada and oil. So it's a serious Canadian export. Carney was trying to help the farmers. China raised the tariff on canola during this crisis issue to 100%. So he tried doing the farmers a favor. In return, Canada is letting in 49,000 Chinese electric vehicles at their MFN rate, which is 6.1% instead of 100% that he had put on after we had done the same thing. You know, it's canola for cars. You could have a long discussion about whether that's politically smart in terms of Canadian politics on Carney's part. Frankly, I have some doubts about that. You know, he's making the farmers happy, but the farmers probably didn't vote for the Liberal Party anyway. The auto guys probably did vote for the Liberal Party. They're mostly in Ontario, and they're not happy. Unlikely to love it. Yeah, right. Although, you know, 49,000 EVs, I don't think is going to break the bank. Trump, of course, is not hesitating to try to score points. He said, well, they're all going to find their way across the border, you know, and this is going to ruin our car industry as well, which very difficult to believe. But that's what he says. I think the other thing that's going on here that both countries are reflecting is this is pre-USMCA maneuvering. I think Carney is trying to show that Canada has some alternatives and therefore has some leverage in this negotiation. And Trump is trying to say, oh, no, you don't. And I can retaliate with 100 percent, bigger and better than anything you can do. And I'm willing to do that. So it's kind of a little bit of a leverage game. The threat was qualified. I mean, he hasn't carried it out yet. It's like his Iran threat. He hasn't done anything about that. And it's like the Korea threat, which was followed the Canada threat, which was to go back for 25% there because they're not moving fast enough on the trade agreement. But on this one, he said, they're negotiating an FTA with China, and I'm going to do 100% tariffs. And the Carney response, which was accurate, was, A, we're not doing that. It's not a free trade agreement. And B, there's a clause in USMCA that says we can't do that without notifying you in advance. and we're respecting the clause because we're not doing it. So I think the Canadians sort of substantively... Trump doesn't care about that though, right? No, no. The Canadians have the better part of the argument, but that doesn't matter. And so the leverage game goes on and it just confirms what we said about USMCA before. I can see a path to renewal, but there's going to be a lot of drama for the next six months. And this is just the first act. Look, I think Bill's got it scoped right, is that the China agreement with Canada was a very transactional one. And I think it is now cabined off and doesn't really go much further than it already did. As Bill said, it's some territory quota relief for electric vehicles from China. The first cars in, as I mentioned last week, will be Teslas assembled in Shanghai because they've got their dealer network set up and they're ready to take advantage of it. I don't think anybody thought that through, but that's what it is. And in the meantime, canola oil gets a more reasonable tariff than 100%. So that I think is cabined off. I think the logic would dictate that sooner or later, Mark Carney follows basically the Canadian plan with the United States that has worked since 1812. That plan is very simple. Be tough enough and stand firm enough to make any U.S. incursion, whether militarily or diplomatically, or in this case, economically, make it painful okay I mean Canada always been able to push back I respect them for that In the early part of the 20th century Canadian armed forces were some of the toughest forces out there and made great sacrifices in both the world wars. So take nothing away from the Canadian military when they were called on. But Canada always finds a way to stand up and push back when the US needs it. And at the same time, there is always an extension of friendship. There's a colorful claim that we're your partner, we're your ally, we're your friend. And Canada has over the years done an excellent job of balancing that. Their ambassador does a superb job in Washington creating that balance. I think Prime Minister Carney will return to that. He will realize the limits of both an agreement with China because it is essentially prohibited by the USMCA. But also the fact that, you know, the trade is still governed by gravity. We haven't repealed the law of gravity. You tend to trade more with your closest neighbors. And Canada's likely relationship with the U.S. will continue to be its number one export market, almost regardless of what it does from a policy standpoint. Just before we move on to the next topic, we haven't done this in a lot, but can we just take a quick step back? What are both of you looking at over the coming weeks in terms of the USMCA review? Are there any kind of key moments here that our audience should be looking for? The Ambassador Greer just announced, I think yesterday, that they were going to start meetings with his Mexican counterpart and beginning to discuss general trade relations, but also getting into USMCA issues, mentioning rules of origin, which was entirely predictable, labor review mechanisms, which was also predictable, and a couple other things. So the process is starting. I mean, it's following the script. The script last fall was each country have internal consultations with its own stakeholders on what they wanted to have happen. We did it. The Mexicans did it. The Canadians did it. And now we are moving into the process of let's have trilateral or successive bilateral consultations. The thing to watch is whether the United States tries to force us into bilateral frameworks, which Ambassador Greer has talked about. He said they're going to start talks with the Mexicans. He did not say they're going to start talks with the Canadians. Now, I think that will come. And presumably, trilateral talks will follow bilateral talks. But maybe not. You know, both Ambassador Greer and Trump have raised the possibility of not extending the agreement and instead having two bilateral agreements. I think that would be a mistake, but it's on the table. Yes, and that's exactly what I'm watching for. I'm watching for the signs that what's going in preference by the Trump administration for bilaterals instead of a tripartite agreement. And to the extent that the talks themselves begin to show that maybe the way gravity is moving and everything. So I don't know. A lot of work to be done. Yeah. It's a big, important agreement for all three parties. It's important to get it right. Trump also talked to President Scheinbaum this morning, I think, and typically said it was a good conversation. They both said it was a good conversation. And apparently they've agreed to meet. Date's uncertain. And it sounds like they're going to visit each other. It sounded vaguely like that. So we'll see how that develops. But no explosion. Yeah. No blow up, no insults, all good news. Okay, we'll keep an eye on it. I want to turn next to get your guys' takeaway from a busy week at the World Economic Forum in Davos. And Davos, by the way, I checked earlier today, is actually warmer than D.C. today. And believe it or not, more expensive. Very much more expensive. There was a lot going on in Davos. Prime Minister Carney, of course, made a splash with his speech asserting the rules-based order was undergoing a rupture, not a transition, as Bill referenced earlier. We had the wobbly EU-US deal trade talks following the Greenland tariff threat, though that seems to be back on track to a degree. President Macron also delivered a robust foreign policy speech, though his sunglasses stole some headlines. So Scott, I'm going to start with you here. There was a lot going on, but let's big picture, what were your takeaways from Davos? Well, it's a new world in Davos, partly because of the departure from the scene of longtime Director General Klaus Schwab. There's a promise that it'll be more of a business organization. We'll see what comes of it. There was certainly the organization had a fairly clear agenda and was driving it fairly strongly. And a lot of portions of that agenda that were so promising a year ago look like they're going nowhere. So we'll see what happens in the interim in the hands of sort of the Black Rocks and J.P. Morgans of the world. It may be a very different operation. We'll see. This year, I was surprised and modestly impressed by the very effective stage management of the U.S. government delegation. Well, first of all, as we talked last week, we had this, let's call it the Greenland gambit that essentially created a complete vacuum on anything else. It just, it focused all the attention on that story, which started with the typical Trumpian, expand the universe, size up the counterparties, art of the deal, and ended with the NATO director general and the president agreeing to something that everybody seemed happy about. So it was quite a little morality play all wrapped up in the week of meetings and definitely overshadowed it. At the same time, U.S. cabinet members who were there were quite aggressive that the world's changing and were not mincing words. I thought Commerce Secretary Lutnix, he was definitely the blunt Wall Street guy with the chainsaw personality and played that role very well. His comment was, when I finished my remarks, there was one person over saying, boo, boo, turned out to be Al Gore. Al Gore. which was quite amusing if you step back from it, but at least Secretary Ludwig thought was amusing. And then Treasury Secretary Besant was in his role as George Patton, basically, as the closer, and making a very clear statement about where the U.S. was going and how others could lead, follow, or get out of the way. So in any case, there were a few good speeches. We mentioned Prime Minister Carney's speech got a lot of rave reviews. It was actually a very well-structured speech. I'm not sure it's going to have the effect. He hopes it will, because when you get back and look at the latter day, the notion of, I mean, he did make the point that the hegemons are screwing up the trading system, particularly US is screwing up the system, and that the middle powers are going to heroically fix this. The middle powers is a phrase that's been around for a while. In fact, you go back to the aughts at the World Trade Organization, the key committee chairs and leaders among the ambassador corps were all these sort of middle powers. New Zealand shared the agriculture negotiations. Back in the day, Hong Kong had an old British diplomat, Stuart Harbison, who was basically second in command at the WTO, and very effective middle power work to make a system that was in everybody's interest, worked very well. And those countries who were too small to throw their way around like the United States, but big enough to care about the rules, tended to do a very good job working in that organization. How they show up outside of that remains to be seen, and particularly the comments when linked to what is a doubling of military spending that Prime Minister Carney promised. Well, look, you've got over 100,000 miles of coastline, and you had seven submarines. 14 is better than seven, but, you know, there's a ways to go there in terms of defense obligations. We'll see if there's more or less than meets the eye, but it was at least recognized as a good speech. Finally, I would note that one of the more important speeches, but little noticed, was given by U.S. Trade Representative Greer. And he made it not at the main stage, but at the USA House. But he talked very eloquently about the American economic system. Went all the way back to Alexander Hamilton and his 1791 report on the state of manufacturers in the United States. There is a thread of economic policy called the American system, in textbooks and elsewhere which include you know high tariffs and includes promotion of manufacturing within the domestic United States as being in the U interests That goes all the way back to Hamilton And we trying to reinforce that and say this is really the Trump system boiled down to its present day dynamics So good speech. It's worth reading if you find it on the website. But nobody paid much attention in terms of news media. If you find it, I was talking to someone about that yesterday who pointed out it really was a comprehensive tour of American trade policy for the last 250 years. But the interesting thing about it was a 40-minute speech. 34 of those minutes were spent on 1789 to 1935. And six minutes were spent on the last 75 years. Which tells you something about the policy of nostalgia. And other people, politicians, it was saying nostalgia is not a strategy. But when it comes to trade policy, nostalgia is the watchword of this administration, I think. By the way, I was at a webinar this morning with Stuart Harbinson, who is still around, still busy. Very effective guy. I mean, I was... And still blunt. I loved working with him. I'll have a little bit more to say about him because this webinar was about the WTO. But the only thing I'd add to what Scott said, I guess two things. One, Carney dredged up an old, well, kind of old phrase, which I haven't heard for several years. And that's a variable geometry. What does that mean? Well, it was a term that I think came up in the Obama years. and it's a fancy way of saying, let's treat different people differently. And, you know, we're going to have one regime for the good guys, and we're going to have another regime for the not-so-good guys. And it's kind of ends up being a commentary on most favored nation, which I think we're going to get to in a few minutes. It's the idea that countries need to be selective in the way they approach other countries, and they need to be agile in the way they move their policies around to accommodate the different goals that they have and the different strategies that the other countries are employing against them. Was this in the context of the United States or something else? Well, he took pains not to mention any particular country, although it was pretty clear who he was talking about. So I guess the answer would be yes, but you can't read that in his speech. The thing that I would take away from the thing is a little gloomier than what's Scott's takeaway, which is, and it was formed by Greenland. Greenland was not a product of Davos. It all happened at the same time. So Davos was kind of a victim of Greenland. But to me, the interesting event there was that the EU finally showed some evidence of a spine. And they've been an invertebrate for a long time. And there seems to have been maybe an inflection point here that Trump pushed too hard and too far on a political issue, a territorial land grab, basically, from the European point of view. And that caused them to coalesce, unite, and push back. If you look at the data, well, if you look at U.S. trade with individual countries, you know, China and Mexico are consistently the top two or two of the top three. But the EU as a whole is bigger than either of them. They are our largest destination for our exports as a unit. Of course, that's 27 countries. If you look at them one by one, they're all smaller. So they're not without leverage. They've pretty much declined to use that. But we may have seen a bit of a turning point here. Trump backed off, which is, I think, significant. There's probably multiple reasons why he did that. But the point is that he did. And this may be encouraging to the EU, I think, to continue to push back if they continue to be fed up with his conduct. Fair enough. Yeah, we will see how the Greenland thing plays out. My sense is that Ruti saved the day, that he did a very good job of balancing the interests, which is what a NATO director general ought to do. So well done on his part. But I also think the president got most of what he wanted. Well, he already had what he wanted. That's the thing that frustrates me. Well, he had some of it. He had some of it. I think he's better off now, but we'll see. We haven't seen the details. I'm pretty sure he's better off on rare earths. Oh, well, maybe that. The question of access to Greenland, what he got is what he already had. Oh, access here, that was never really in doubt because of the 51 Treaty. Exactly. Yeah. Right. Well, our invites to Davos got lost in the mail this year, but there's always hope for next year. You mean you weren't there? I wasn't there, but I think next year, three of us should hit the slopes. I've never been. I tend to have the Groucho Marx attitude about these things, and I wouldn't want to belong to any club that would have me as a member. That's my favorite line of all time. Probably none of our listeners know who Groucho Marx is. One of these days, we'll have a lesson on 70s and 80s culture, or 60s and 70s culture. This harkens back to a conversation we were having offline a couple of weeks ago before we started airing about Mayberry. And we put our young staff to the test to quiz whether they knew what Mayberry was and it was crickets. They had no idea. Scott knows. Scott's a North Carolinian now. Yeah, I do now. And it turns out Mount Airy, Mount Airy, North Carolina, was the hometown of Andy Griffith. It's his boyhood home and is somewhat modeled after it, although it's not exactly Mayberry. It's close. Take a trip down there sometime. Yes, indeed. I miss Barney Fife. All right. Let's wrap up today with a discussion on proposals to reform the World Trade Organization. The United States has recently re-engaged with the WTO and submitted a letter in mid-December calling for several reforms. The EU got in on the action in January with calls for reform around the most favored nation or MFN principles, which as I read, it seems to be a primary focus of the calls for reform. So Scott and Bill, I'll throw this to both of you. help me out here. Help me understand what's going on. What are we talking about when it comes to MFN and what's prompting this from the US and EU? I think you've picked the right issue. I think MFN is going to be the, it may not be a key issue at the forthcoming ministerial, but it's going to inform the debate at the WTO going forward because both the United States and the EU came in with essentially papers that said, we need to rethink the concept. This was a bigger switch for the EU, which is until this paper had been a staunch defender of it. Not a big switch for the United States and not a surprise for us. I've been saying for three or four years that it's virtually dead. We ought to begin with what it is for our non-wonky listeners. Basically, it's Article 1 of the WTO. It's the most fundamental rule. And it basically says a concession made to one needs to be made to everybody. So you can't have, and there are exceptions, of course, there are always exceptions, but you can't treat countries differently. So if you agree to lower a tariff to country A, MFN, most favored nation, requires you to lower it to everybody. The idea was to force more trade liberalization and to prevent trade fragmentation, countries going off and cutting side deals by themselves that would carve the world up into units. This was designed to create a global system of freer trade. And it did that. Now, there's an important exception, which has been there from the beginning. And that is that you can negotiate more limited free trade agreements. So the United States, I think, has 18 of these. We have one with Oman. We have one with Bahrain. We have CAFTA. We have USMCA. We have one with Chile. We have one with Australia. And under the WTO rules, you can do that and provide a benefit that is not MFM-based, just affects the multiple parties that are involved, if that agreement, quote, unquote, covers substantially all trade. That turned out to be an elastic concept Most FTAs free trade agreements don cover substantially all trade because most of them don include agriculture an historically sensitive area The United States to its credit has insisted up until this administration well actually up until the Biden administration, has insisted that SFTAs do cover substantially all trade. And they do. And that doesn't mean 100%, but it means high 90s. And they've been doing that. So, there are exceptions, but what has happened now, you know, Trump tore up the script because basically, you know, the minute he had Liberation Day and had differential tariffs for different countries, that was the end of the United States' use of MFN. And now the EU is coming in saying, maybe it's time for everybody to do that on the basis of reciprocity. That was the word that Shevkovic, the EU trade commissioner, put into the debate. Not a new word. But the idea is, basically, if the United States is going to hit us with 50%, we ought to be able to go back and hit them with 50%, but not have to do that to the whole world. Yes. Now, this has been creeping around the edges of the WTO for some time now. The basic principles of non-discrimination are really important. I want to reemphasize that there are two ways of judging non-discrimination. One is called most favored nation, which means you extend the terms to country A that you extend to all your other normal trading partners. And then there's national treatment, which basically says you'll treat the products of country A no worse than you treat domestic products in a like category. And the combination of national treatment and MFN are very powerful tools to remove discrimination from the trading system, which I think overall is a good thing. And most traders think overall is a good thing. It's crept in because there's many members who want to go further in the WTO and have been unable to because of the free riders that if you negotiate an agreement in, say, government procurement, as an example, and make concessions to others who are at the negotiating table, and then apply the MFN's principle, you have benefits occurring to a large number of countries who undertook no obligations. So that's what's known as a free rider in the system. The WTO government procurement agreement is a non-MFN agreement. So it's been broached. Same with the information technology agreement. Although practical purposes, the ITA covers essentially all production in the sector that it applies to. Yeah, but there's a difference, though, to keep in mind, Scott. Yes. The government procurement agreement is closed. Go ahead. The benefits only apply to the signatories. Right. The ITA is open. Correct. And they tolerate free riders. The reason they tolerated free riders is because the participants at the time accounted for about 94% of the production of the covered items. So they decided that 6%, who cares, you know? So that is an open agreement, but it's, I think, the only one. Yeah, fair enough. And so it's been a struggle technically on these agreements in the past. NFN has been an area of contest. And now with basically President Trump's approach and the importance of reciprocity, it's really gone from the frying pan to the fire. So that's going to be one of the issues. There are a lot of others. If you go back to the December letter from the U.S. ambassador to the WTO and his overall critique of the issues that not only need reform, his submission, also the U.S. submission, also talks about the limits of the WTO. and said there are some things that it shouldn't be bothering itself with, as well as some internal matters to reform. So it's a very comprehensive critique on the part of the U.S. that is well worth reviewing. I don't know how much energy we have to actually fix this, but there's a lot of unhappiness. Well, that's that. What comes next? Well, not a lot of energy, but I think Scott's hit on the one thing that is different, actually, between this administration and the Biden, actually, and even the Obama administration's on this. which was sort of the tone and the emphasis on limits. The specific things that the U.S. paper focused on are not new things. Plural laterals and the idea of sort of coalitions of the willing, which the United States has championed for a long time because of the increasing difficulty of getting 166 countries to agree on anything, they came out for that. And that was a disguised attack on India, which has been standing in the way of those. We've talked about MFN. And the issue of what's called SDT, special and differential treatment, has been a U.S. complaint for a long time. This is the provision in the WTO rules that allow developing countries to either, depending on the rule, either be exempt from the rules or to have a longer period to comply with the rules. It's designed for developing countries. But who's developing and who isn't is a matter of self-definition. So you've got a lot of countries, including China, that claim that they're developing countries. Fixing that and regularizing that has been a U.S. priority for at least 10 years. Dealing with the dispute resolution system goes back to the Obama administration. And dealing with non-market economies, you can choose your word, non-market economies, overcapacity, economic coercion, they're all sort of in the same bag. is not a new theme either. So in a sense, I took heart from the US paper because it means they're participating. They showed up and they said, here's an agenda. And I don't think they're going to get that far with the agenda, but at least they're going to play the game. And we have an ambassador there. And the EU is playing the game too. I don't think, and based on the thing I participated in this morning, nobody seems to have high hopes for the ministerial that's coming up at the end of March to break a lot of ground. But I think what you are going to see is a lot of active debate and discussion and hopefully at a minimum, some work plans and parameters set out for the next two years. All right, guys, we'll keep an eye on it. This is our last episode that will air before the Super Bowl. So I'm not letting you guys go without getting your Super Bowl predictions in a game that I frankly couldn't care less about. But Scott, I'll start with you. Pats or Seahawks? Well, it is an emotional matter. I'm glad to see the Patriots make the comeback they've made with young talent and a very talented coach. I do like Vrabel. He's a good coach, yes. It's so impressive. And the turnaround that is really, you can only conclude that this individual and the people that Mike Vrabel surrounded himself with know what they're doing. Because to go from two seasons of, I think a total of four to six wins per season, really mediocre, worse than mediocre performance. for two years and then this immediate turnaround to a very strong and championship-level caliber team. It's impressive. That gives me hope for my Bengals. Bill? Well, as typically, since I'm not a huge fan of these things, my sentiments are based entirely on other things. I'm for Seattle because it's my favorite city in the whole country. It's a great city. It's not a very objective view because of the seven times I've been there, it was not raining six of them. You should play the lottery. I don't have an accurate view of actually staying there, but I think it's a wonderful city. The Seahawks have, I don't, is this the first time they've been in the Super Bowl? No. No, no, no. A couple of times. No. Yeah. Well, I mean, this is the rematch because they played the Pats and made that disastrous decision to throw it at the goal line. And the Pats intercepted it when they had, could have just run the ball and won the Super Bowl. So this is, there's retribution on the line here for the Seahawks. Well, as far as I'm concerned, the Patriots have won enough. They don't need another one. I am for the Seahawks. Fair enough. All right, guys. Good to see you. Thanks to all of our listeners. We'll see you next week. Thanks. You've been listening to The Trey Guys, a CSIS podcast. For more audio content, visit csis.org slash podcasts. Thanks for tuning in. Thank you.
