Raghuram Rajan Questions “Modi Trump Friendship” Over 50 Percent Tariffs | India Vs US | China

[Music] Good evening and welcome. Thank you for joining us for tonight's discussion. I'm John Eden, chairman emeritus at William Blair and chair of the council's board.

We meet tonight at a pivotal moment. Over the past year, US trade policy has undergone a dramatic transformation, and we've seen new tariffs, evolving partnerships, and shifting dynamics with both allies and competitors. At the same time, other powers have started to assert greater economic influence on the world stage, particularly India and China. As two of the world's largest nations by population and GDP, India and China are significant suppliers of goods and critical resources, and both have become focal points of recent trade tensions. In August, the US imposed a 50% tariff on India over its reliance on Russian oil. In recent weeks, China enacted sweeping restrictions on rare earth mineral exports, prompting President Trump to threaten 100% retaliatory tariffs. The decisions being made today have serious consequences for daily life, affecting what we pay for goods and whether we can access them at all.

The Chicago Council has long championed dialogue on the most pressing issues of our time. That's why we've made these conversations a priority, resuming our global economy round table series and hosting public programs like next week's conversation on the renegotiation of USMCA. To put it plainly, talking about the global economy and trade is more important now than ever. There are few people better equipped to guide this conversation than our guests tonight, Ambassador Michael Froman and Ragaram Rajan, as both have played pivotal roles in shaping global economic policy. Please join me in welcoming them to the stage along with our moderator, Council President and CEO Leslie Vjamorei. [Applause] [Music]

Welcome and, um, thank you, uh, John, for that kind and warm introduction. It is such a privilege. What an audience. Wow. Uh, how wonderful to see everybody. Um, it's such a privilege to welcome you to Chicago, Mike Froman. Um, President Mike Froman of the Council on Foreign Relations. I know you've been here, an ambassador. I know you've been here many times. Um, the Council on Foreign Relations has a very long-standing relationship with the Chicago Council on Global Affairs. Um, it precedes many of us, but not all of us in this room. And you and your predecessors have really done a tremendous job of making the trip, um, to Chicago and really working with us to bring audiences together around the most important questions in global affairs. Um, so it's a huge honor to have you return. Thank you. Thank you for doing this.

>> Um, Ragu Rajan, who many of you will know, um, is long associated with the Chicago Council on Global Affairs as a board member. Um, many of you will know Ragu Rajan for his extraordinary contributions across the field of economics through his writings on India and the global economy. Um, as a professor at Chicago's Booth School, as former, um, governor of the Reserve Bank, uh, of India, as former chief economist, um, at the International Monetary Fund. Uh, you will probably know, uh, Ambassador Mike Froman mostly as president, uh, on the Council on Foreign Relations, but also previously as the United States, um, trade representative during the Obama administration, one of the last great moments when America really tried hard, uh, to negotiate major regional and multilateral trade deals. You worked on the Trans-Pacific Partnership, uh, the TPIP, some WTO deals. So you bring with you tremendous expertise. You had previously been in government as well, in the National Security Council. You worked for Mastercard. Um, so we have, uh, on this side of the aisle, some really truly, uh, extraordinary experience to talk about, uh, the question. I think we've framed it today as the trade triangle. By the way, we are on the record. Um, which I think once you're over a certain number of people is the smartest way to, to go, but also since we have such a deep commitment, uh, to elevating public knowledge and information and understanding and exchange here at the council. Um, uh, we're here to talk about trade and the trade triangle. We've talked, we've sort of put it forward as being about the United States, China, and India. But I think that we all know that trade, uh, in today's world is the way in to talking about geopolitics, geoeconomics, artificial intelligence, technology, power, populism, leadership. I mean, you sort of name it. All you have to do is say trade, and people read on to it, basically every opportunity, challenge, risk, uh, and trend in today's world. So you can talk about whatever you like. Um, but let me start, um, with a question to you. Um, may I call you Mike?

>> Yes, please.

>> Thank you. Um, uh, >> only my children are required to call me your excellency. Um, uh, but may I start? I, you know, I, I sort of said backstage, um, that we'd start with description, and then we'd maybe go on to diagnosis, and then maybe we'd talk about prescription and prediction. But, you know, we'll, we'll get into the weeds on all of these questions. But if you were going to look at the world today, um, through the lens of the things that you think about most when you think about the international trade order, I guess, Mike, when you think about the United States in particular, how, um, do you describe the world that we are in, um, and as you're experiencing it, not only as a, you know, one of the world's greatest trade experts, um, but also as somebody who is leading the conversation in New York and Washington and globally on, uh, trade in a very tricky political situation?

>> Well, uh, first of all, Leslie, thank you very much. Thanks for having me, and it's great to be in Chicago. It's great to be at the Chicago Council. Uh, and congratulations on your leadership of this great institution. We view it as a sister institution to the Council on Foreign Relations, and have a good and close, uh, close relationship. Um, look, I, I, and I look out at this, at this, uh, audience and think how, when I was US trade representative, how hard it would have been to fill two or three rows of people interested in trade policy back then. Uh, but, uh, you know, thanks to, to President Trump, uh, he's made trade great again, and, uh, that has generated a lot of interest. You know, where, where are we? What's, what's the description? Um, uh, look, I, I think the multilateral rules-based trading system, which the US spent the better part of 80 years designing, developing, promoting, growing, attracting other countries, uh, to it, defending it. Uh, I think it's effectively dead. I think that, uh, uh, we should not expect big multilateral trade rounds out of the World Trade Organization or any of the other sort of functions that we attributed to that, to that system. And the question is, where do we go from here? There's lots of reasons why it's dead. Um, uh, you know, my view, it was not, there's some design flaws to it. I don't think it was designed to integrate an economy as big and as important as China, that follows a fundamentally different set of rules. Um, and then with China following its own set of rules, and now the US following its own set of rules, you have the two largest economies in the world, 50% of global GDP, more, more or less, not abiding by the rules-based system, and therefore, you know, what's left of it. Um, other countries may continue to abide by it, uh, but I think it's, it's really fraying at the edges, and without the two most important economies in the world participating and defending it, uh, I think we need to look for alternatives.

>> Okay. Um, Ragu, uh, your description of where we are, and maybe if you could come at it a little bit, um, I mean, feel free to, to, to add on what you've heard, but if you could come at it a little bit, since you've written a wonderful book on India, um, just recently, uh, perhaps you could come at this from the perspective of the other two countries in the title of today's event, China and India.

>> Well, uh, maybe, um, I'll come at it more, uh, down the line. And I, I just want to take this, you know, was the structure flawed? And obviously, it worked for a long time, and, uh, I think, uh, to the point where the emerging world, uh, in the 80s, 1980s, 1990s, uh, very thankful for the United States for having not just created it, but persuading them to come on board, because, uh, export-led growth was the fastest and most surefire way to grow for those countries. Now, you know, some of you, um, in your economics course read about comparative advantage, etc. The, the question is, as the US sort of started buying stuff from others, and as their manufacturing got better, and, and it, uh, manufacturing went away from the United States there. What was left in the United States, especially for those who were, you know, th, those who had that job at GM or in a furniture factory making making goods? And that's where I think it started slowly breaking down. And that's where Mike's point about China coming in. Whether they cheated or not, we can spend a long time talking about that. But what was clear is that there was an enormous manufacturing power which came on board and competed with the United States. So if the manufacturing jobs went from the United States, what would take their place? And presumably, you could argue that for the people in this room, it was high-quality service jobs, whether in consulting, accounting, uh, design, uh, very well-paying. It was a good bargain. You could buy the cheap stuff from China, and in turn, uh, your lifestyle improved. The question is, what about the rest? And that's where I think, um, moderate skills service jobs would have been a natural one to replace manufacturing jobs. Um, uh, the question is, were they of adequate remuneration? Could you go from a good job at GM to these jobs? And there, I think the one question you have to ask is, did the US, by allowing the kind of immigration that it did at the lower end, in a sense, put pressure on those kinds of jobs? Those jobs could have been more, I mean, if you talk to economists, they say, oh, we see no correlation between immigration and, and remuneration. But you think that it, there must be something over a long period of time. And the question is, were those two, open trade and open immigration, especially at the lower end, something calculated to put pressure on a group that has become much more dissatisfied, and that both parties are to some extent catering to when they talk about, you know, good union jobs, etc., etc. They're trying to bring back the past, but they didn't allow one way that this, this group could have, could have benefited. And the question is, are they trying to do it in a different way? Now,

>> Before you jump in, I want to ask, I want to focus, um, on this very specific part of this question, and, and feel free to add to it. And it's the 2001 decision to bring China into the World Trade Organization. The last time I heard Bob Zelik speak, it's been a few years. He, um, he still does defend, as I understood him, the responsible stakeholder thesis, which has been largely discredited in expert circles, that China would, you know, liberalize and play by the rules if it was allowed to be part of, uh, the WTO, and, you know, brought in more generally. And his argument is that we're not really thinking about how things would otherwise have turned out. It's not, you can't just look at, you know, what China didn't do when it was in, but if it had just been left out, what would have happened?

>> Um, so I, I wanted to really get your thoughts. Um, as somebody, I don't know where you were in the run-up to 2001, but I bet you were in this debate. Um, how do you consider both that decision, um, and, um, and its, and its consequences?

>> So, first, I very much agree with, with, with Ragu's assessment, and I think I just would add one more dimension to it, which is a geographic dimension, uh, because the, and goes to your question about the, the so-called China shock, what happened when China joined the, the global economy. You know, the, the benefits of globalization were broadly shared and rather invisible. You know, nobody walks out of a Walmart and says, thank goodness for the World Trade Organization. I mean, I do, but nobody else does. Um, uh, uh, and the cost of globalization were very visible and acutely felt in particular communities and particular geographies. So the, you know, the one factory town that lost that factory, um, you know, with the theory was investment, creative destructionism, new jobs would be created, and that's true. New jobs were created. Um, we have relatively low unemployment rates. We have relatively high, uh, labor participation rates that have fluctuated a bit, but it wasn't necessarily in that community, in a timely fashion, that mattered. And so you had unemployment, decline of a, of a town, opioid use, unmarriable men, social, uh, diffusion, the social contract, you know, began to fall apart. And I, I would argue, and, and David Autor and Gordon Hansen have argued this as well, with data, rising populism precisely where these sorts of actions, uh, happen. Um, and so, you know, we've never, and what concerns me, maybe I'm jumping to your third section of prescriptions, but, uh, we, we've never spent, neither Democratic nor Republican administrations, spent nearly enough energy thinking about how do you help workers, uh, thrive in a rapidly changing economy, whether that change is coming from automation, which is where most economists think, or economists think most of the, the dislocation comes, whether it's from trade, whether it's from immigration, or pressures from immigration. Um, how do we help people continue to get the skills and make that transition to other jobs? And sometimes that might mean mobility, but it could mean place-based economic development plans. It could mean lifelong learning. It could be all sorts of, of programs. And we're just not doing it. And, and the reason why it's significant now, even more significant now, to get, now, I'll answer your question long way around to your question. You know, the China, the so-called China shock, uh, is estimated to have cost the US 2 to three million jobs, manufacturing jobs, over a 12-year period. 250,000 a year, 20,000 a month. Very serious and acute for those who lost their jobs and in the community, for many of the communities in which they operate. But actually, in the grand scope of things, when you have 130 million workers and 40 million people change their jobs every year, um, arguably it's not as significant as the kinds of dislocation we might see with AI. And we still don't have any programs in place to think about how displaced workers are going to, uh, are going to get through here. Greg is absolutely right. I mean, most coal miners want their children to work at the airport. They want them to have cleaner, safer jobs in the service sector, you know, for people of similar education, uh, levels. And, you know, there was a lot of downward pressure on wages from, from, from immigration. And, uh, those workers ended up trading the, the unionized jobs of the 1950s for the non-unionized, less well-paid, lower benefit jobs of the service sector, uh, of, of, of the, of the 2000s.

>> So let me follow up just with a very concrete question, and then I, I do want to hear a little bit in comparative perspective about where, where India sits on this. Um, if you were going to rewind, would you have, and I'm making an assumption about what side of the fence you are on, but would you have, uh, pushed to bring China in, or would you have just said, bring them in, but have those domestic social safety net and transformative programs?

>> Yeah. So first, it's hard to go back to, you know, the, the, the mindset that we had back then. At the time, you know, Jenzamin Jironji, leaders of, of China, there was every indication that China was going to be on this inexorable path towards greater market opening, greater liberalization, and they have gone, you know, very significantly towards greater reform, uh, just not as far, as fast, and as linear, in a linear fashion, as we thought. You know, I think the World Trade Organization, the global system, the rules, uh, were weak in a number of respects. Uh, and weak, it turned out, exactly in the respects that they needed to be strong to deal with China. Uh, the role of state-owned enterprises, the role of subsidization, intellectual property rights protection. I mean, these were key elements of what became China's export-led strategy of becoming the manufacturing floor for the world, creating excess capacity, and then using that, their scale, to drive competitors out of business in other, uh, industrialized and other emerging markets, um, and, and dominating those, dominating those markets. And we see that today with the electric vehicles, you know, they're on the path towards producing, I think, 20 million vehicles a year, which is the entire global demand for vehicles. Where are they going to go? You know, the US is going to largely close its market, I think, to electric vehicles. Europe, which is more ideologically committed to free trade, will I think still engage in protectionism, but is probably more open to having Chinese imports. You know, they're going to look to India and Brazil and Indonesia and South Africa. How many of those, you know, tens of millions of cars a year, can those countries absorb? Do they have the infrastructure for it? And you, this is the, and you can replicate this on clean energy equipment, on solar panels, on any number of other products. Uh, the Chinese have been quite concerted, and, and every time economists, including Bob Zelic, at, at the World Bank, would go to them and say, you've got to engage in economic reform to rebalance your economy, to move away from such an emphasis on export-led growth, and to move more, adopt a social safety net so people don't save 50% of their income so they spend it, have more domestic demand, consumer-led growth, and the Chinese, even just recently, even the last couple weeks with the new, have basically ignored that and said, we're going to keep on growing by, you know, being the export engine that we are, the manufacturing engine, and they're on the road to being, I believe, 40% of all manufacturing capacity in the world, which is historically, I mean, absent the sec, end of the second world war, when the US probably was about 40%. Um, you know, it's never before has one country dominated global manufacturing.

>> So I asked, let me just say one thing. The reason I asked the question is it's not meant to be an indictment. It's also, it is meant to first of all get at the question of, you know, we thought about the world in a very specific way, and how we changed behavior of states.

>> Well, we did not. Yeah. Well, we did not anticipate.

>> Should we continue? But also, China was tiny at the time. I mean, you didn't say it, but you know, you sort of indicate it was a tiny little country relative to what it is now as a share of the global economy. When it entered the WTO, what, what percentage of the global economy?

>> I, I think early, early 2000s, it was a trillion, trillion dollar economy.

>> But as a share of the global economy?

>> At, it's a 15th of the size it is now, which is.

>> So it's a different. Yeah.

>> It's tiny. It's, it's Canada. It's Canada at that point.

>> Please.

>> Well, I was just saying, uh, with all this going on in China, we think it's, it's a juggernaut. It's unstoppable, but it reflects the, the fundamental flaw in the Chinese system, right? And it's been building up. Uh, you mentioned the, uh, the lack of consumption. That, you know, 2003, 4, I remember going from the IMF to China and saying, hey, you guys, you got to up your consumption. But I think now there's another problem. They reformed their, uh, taxation system for the local governments. Essentially, uh, took away their ability to raise, uh, raise, uh, taxes from the local population, other than primarily through land and land sales, and through value-added tax, which they get from the companies. And, um, what we know over the last, uh, you know, the last few years is land has collapsed because they've been trying to clean up the land market, uh, and stop the kind of rampant speculation that was going on. That has all sorts of effects, including the fact that the primary wealth source of households, their house is now deeply underwater. So, so that also hurts consumption. But it does another thing, which is really insidious. Uh, you know, local governments depend on their revenues from the value-added tax they charge companies. And so now they have a much bigger stake in their company doing well. Now, earlier, this was a great source of growth for China because your local champion was supported. You broke all the rules for your local champion. So China was a great place to do business if you were in the favor of the local government. They made wonderful firms this way, very competitive, fighting against each other, and therefore moving, moving up the value chain quite, uh, quite rapidly. Now, the problem is they need these guys to produce revenues, and so these guys are competing fiercely for whatever markets there are, and that's where the prices they're able to charge. You mentioned the size of the electric vehicle production. Why are they producing so much? Because it's broken. The system is broken because local governments are supporting their local champions. You know, China doesn't subsidize, has been subsidizing a lot, but right now it's getting stupid because it's the local governments championing the local, subsidizing the local champions to actually charge prices which are totally unviable, and that's creating a huge problem for China itself. So, how do we fix this?

>> Before you go into how you fix it, let me just add a few other countries to the equation. Um, you know, the World Trade Organization, the TPP, that that you worked on, and it's there in another form, but not with us. Um, they weren't just meant for the United, well, they weren't meant for China at all, but some of those, they just weren't just meant for the US and China. They were meant for all these other countries. We have India in the title, but, you know, there's Europe, there's Latin America, there are a lot of countries that have benefited from, have needed the predictability of the great economies in the world participating in the rules-based international trade order. Um, how, you know, if you're going to go back to kind of description, a little bit, how does it look like? Choose your part of the world. Maybe you want to talk about Europe. Maybe you could say a few words about India. How is it looking right now to those of us who are having to listen to the United States talk about trade and China motor ahead, and they're sort of on the receiving end of the rules that we make and then break. One thing I think is interesting is while the US spent decades really trying to convince other countries of the merits of free trade and integration, um, they now all get it, and it's the US that has sort of slipped back, right? And so, uh, the EU is continuing to negotiate free trade agreements. I think they've been negotiating with India for only 18 years, so everything in its time, but,

>> But it's, but now it's, we were told it's getting done. So you believe it?

>> Uh, >> I haven't seen it. I haven't seen it yet. But we should talk about the US too. But that, at one point, India said there was very close to an agreement with the US, and then we saw what happened, uh, there. So I, I don't know. Um, but it would be good if it did. Africa, you have a continentalwide free trade agreement in Africa. Kind of astounding. I mean, uh, uh, the one of the hardest places to get people to think about opening their economies and integrating, 54 countries. You know, it's not a great agreement, but they're on the road towards implementing it. And so, uh, so other countries are continuing to to move ahead. TPP, that you were, uh, kind enough to, to mention, which I, I spent, you know, several years of my life on, and then it didn't go anywhere. Um, uh, but it did, it way, so we're just not without the US. The UK has joined it.

>> Europe is now thinking about some kind of relationship with it. I heard this week that the UAE is exploring joining it. There's a long list of other countries that want to join it. And the whole idea was, okay, if we can't get this done at the WTO because China will block it, or India will block it, or somebody else will block it, let's get a coalition of the willing together who are willing to sign up to high standards amongst themselves. Um, and TPP was designed to be developed and developing countries, large and small, Asian and Western Hemisphere, a certain amount of diversity among the, the 12 original 12 countries to say, okay, if, if Vietnam, or if Peru can sign on to this, then other developing countries, other emerging economies can, can sign on to it, uh, uh, as well, and to be an example and a magnet for others. And frankly, that's where I think the global trading system is going, is what I call open plurilateralism, which is countries coming together with other like-minded countries, setting up rules around things that they have common interest in, and then leaving it to open to others who want to sign on to those rules. You know, not to water down the rules, but to join and sort of raise the standards everywhere.

>> So, before I come to you, I, I have to push you a little bit on this, because you're painting a world of, you know, two behemoths that are kind of illiberal in their own way, and then the sort of rest of the world that's liberal. And we know that that's not how the rest of the world is. We know that we have populism, we have anti-immigrant movements. Some of them are gaining traction in certain parts of the world. Some of them aren't. Being opposed to trade is presumably part of that agenda. Um, and, and then I guess the other question is, you know, how much does it amount to really, if the United States is not really in the game, if China still isn't really in the game, then if Africa gets together, if Europe is, you know, working with Mercosur, like, what does it really amount to in real terms? Um, how meaningful are those trade agreements?

>> So, first, I think you're right that immigration seems to be a common concern of populists in Europe and, uh, and elsewhere. Uh, I'm not sure trade is. Europe, you know, Europe, there's been more of a consensus towards trade. The whole European project, the whole European Union, is really based around opening, integrating with each other. They've put a high value on that, and they're very much committed to multilateralism. It'll, it'll be interesting to see what strains that comes under. Uh, uh, Germany, of course, you know, has been very reliant on the China market. It's now finding that it's getting squeezed out of the China market. There's much more openness in Europe. We go back to electric vehicles, to having these really, you know, uh, terrific Chinese companies. They produce excellent electric vehicles, very well-designed, relatively inexpensive, um, to come and invest in Germany. What happens when Volkswagen, BMW, Renault are done, and they're replaced by BYD and other Chinese companies? Either officially replaced, or they just buy, you know, BYD ends up buying Volkswagen. I think the political ramifications in a country like Germany are pretty significant, and you might see this commitment to free trade, which in, in Germany, as well as Scandinavia and other parts of Europe, has cut across,

>> Management as well as labor unions,

>> Which is a different dynamic than what we have here. I think you might see some fraying at that point.

>> An opportunity for a certain kind of leadership.

>> Yes.

>> Um, Ragu, tell us about India. You know, India was hoping, the bet for Democrats, for Republicans, for Indian leaders was that, you know, obviously trade between the US and India hasn't been perfect, but certainly the relationship was charged and moving forward seemingly singularly until recently. Um, how does India sit positioned, you know, multi-aligned, non-aligned, stumbling to grow, trying to grow, where does India sit in all of this?

>> Well, I think India was getting closer to the United States over the last, you know, 20 years, and, uh, it's very disappointed. Uh, I'm not talking about leadership. I'm talking about people,

>> Uh, who, you know, get hit with this. I mean, to rub salt in the wound, uh, at the same time, Pakistan has a, has a tariff rate of 19%, India has 50. Uh, where is the friendship between Modi and, uh, and Trump that was extolled? And, and it's a slap in the face for Modi, because, uh, the Indian opposition is asking him, where's your friendship? What were you talking about? Was it all, all? I think it's a, it's one of those things where I think they'll figure out, uh, an agreement. It can't be that you're the most tariff country in the world, more than China, and, you know, you talk about, uh, you know, military friendship and, and alignments and, and joint maneuvers and so on. Uh, so I think they have to come to an accommodation, but I think these kinds of actions stay long in people's minds. The US cannot be trusted. I mean, the earlier, it took a long time in, in the early 1970s, when, uh, Nixon and Kissinger, uh, tilted the US towards Pakistan in the Indo-Pak war in 1971. They sent the seventh fleet to stop the war, uh, to help Pakistan. Uh, Indians were very miffed at that, and the Soviet Union helped India. That put India in a Soviet camp for 25 years. It took a long time to get India out of that camp and to start working with the United States again, to the extent that the Quad, uh, relationship, uh, in, uh, and the joint military exercises and all that happened. But this has the effect of basically disappointing India. Now, India doesn't have a lot of other places to go. Um, shares a border with China, has fought, uh, one serious border war and a bunch of skirmishes with China. Uh, India is suspicious of China. Uh, it's also very worried about Chinese goods coming and swamping India. It's happy for Chinese investment, but it's wants to be a little careful about becoming dependent on, on China. Um, India's good friends with Japan, Australia, that, you know, parts of the Quad can, can, can sort of be, uh, be relied upon, but it, it wants to build a relationship with the United States, and very disappointed that it, it became transactional.

>> Can you say just a word about what the impact of the tariffs on India have been domestically within India? Have they, has that impact been felt yet, or are we waiting for it, or?

>> So, uh, it is, I, it, it is felt across different industries in different ways. So Apple assembles cell phones in India. The value added is relatively small, and they may have gotten a waiver. By the way, a lot of firms get waivers in these, if, uh, if they can persuade the administration it is to the administration's interest to allow the imports. So, uh, Apple, not hugely affected. Uh, an Indian textile manufacturer selling goods into the Christmas season is terrible. I have a friend whose work has just stopped because she can't sell her dresses to US stores with a 50% tariff. It doesn't make economic sense for them to consume, buy. Now, those relationships, once disrupted, are hard to build back because somebody else has taken up the slack, uh, you know, in, in Bangladesh or, or Vietnam. And so it's something that will have costs, and it's typically small and medium enterprises, uh, that will bear that cost. And the longer this lasts, the more it becomes a permanent rupture.

>> Mike, that domestic costs in here, in the United States, of the tariffs, how would you assess those now?

>> Look, I, I think, um, uh, so I think if we think about why Trump loves tariffs, and he's loved for a long time. This is an area of deeply held views. Goes back to 1987 when he gave an interview to Larry King about about tariffs. Uh, as a source of leverage, they've been very effective. They brought other countries to the table to talk about fentanyl, about migration, about other issues. As a source of revenue, um, uh, quite effective. We'll end up collecting something around $300 billion of tariff revenue, which is significantly more than we normally, uh, collect. Although today is, as many of you probably know, there was a very interesting case in front of the Supreme Court to see whether some part of the tariff regime, um, uh, is illegal or not. And we'll see. It'll take court, probably months, to come up with a, uh, an opinion, but, uh, but it'll be very, very interesting to see what happens there. Um, you know, I think we've been surprised that we haven't seen more effect yet. Inflation has ticked up, um, you know, a little bit each month, but it hasn't been as significant as people thought so far, and there's lots of explanations or proposed explanations for that. Um, you know, the tariffs, Trump is wrong. President Trump is wrong when he says foreigners pay it all, but foreigners have paid some of it. If you're Walmart, again, you have a lot of leverage over your suppliers. You can get your suppliers to eat some portion of the, of the, of the price increase. Importers pay some of it. Um, and we should see that in the earnings of US companies that have to import their product. Haven't seen a lot of that yet. Some, I mean, GM took a charge, I believe. Um, others have taken the charge. Uh, and then consumers pay for it. And I think the, the, we just put out a, a chart, I think yesterday, that shows, uh, over the last six months, what percentage is being paid by each, and the percentage being paid by, uh, consumers has gone from 20% to about 60%. So consumers ultimately will end up paying for it, one way, one way or, or the other. And whether it, it adds to inflation, or it's a step change in prices that then sort of flattens out. Um, you know, I think economists have, have, have varying, varying views on it. Um, it's also likely to lead to productivity decreases. You, we had, we have data, you know, in 2018, the Trump administration imposed 25% tariffs on steel and aluminum. Two years later, uh, we had 1,000 more steel workers and 75,000 fewer workers in industries that use steel, in manufacturing industries that use steel. And productivity of those steel mills was 30% less than it was before. So, you know, you, you can't, you can't overrule the law of economics through executive orders, right? I mean, there, ultimately, it sort of comes through. It may take more time, and even on tariffs, you know, there is a view that it may take a couple more quarters for us to see the inflationary effects, effects on growth, maybe take even longer. Um, u, but it's hard to deny that if you're raising, that this system we're going to be living with for a while, for maybe for the, for the foreseeable future, uh, is going to be more expensive, you know, less efficient than the system that we had before. And those costs have to show up someplace. And, you know, just to add to that, you know, you are now today, um, in the great state of Illinois, uh, with a lot of farmers who, um, as I understand it, from our members of Congress who have spoken here, Congressman, uh, Quigley and Lood were here not so long ago, and the impact on those who, um, are in the soybean sector of our economy has been significant.

>> And, and that was one of the issues that President Trump and President Xi discussed, and, and China agreed to start buying US soybeans again. But we'll see, as, as, >> you know, those, those days and months, um, have real impacts. Absolutely. You know, so, and, and the relationships do, you know, once they develop relationships with Brazilian exporters, it's harder for the US to get back into the mix.

>> Critical point here, and, and we had a call earlier today where somebody, um, uh, made that comment, that exact, um, comment, um, uh, that, you know, it's not just, it's not just the cost, it's the market share that you're losing. You don't go back. That those don't just flip back. So I want to, before we open it up to the audience, I do want, you know, now, so we have this trade order that's looking very different, um, for a variety of reasons, and notice that we really haven't talked about, um, the president. We haven't needed to talk about, I mean, we've talked about him through the tariff, the lens of the tariff policies, but a lot of other things going on that we've, that we've gotten at. Um, and now we have, of course, this question of, that you alluded to, of artificial intelligence, which is another moment of potentially creative destruction with huge social costs. And we have, and this, both of you have written about, just in recent months, um, in Foreign Affairs, in Foreign Policy, and elsewhere, about how you fix this, and, and can we look to the rules? Can we look to our institutions? Should we, you know, should we do different kinds of deals? How do we, um, begin to fix this? You know, obviously, there's all sorts of domestic, social, and economic considerations that you've discussed, but if you turn to the rules-based international architecture, the liberal international order, the WTO, the trade agreements, where do we go from here? Even if we can't go somewhere right now for political reasons that we're all very aware of, there is going to be a moment where, you know, and hopefully at the Council on Foreign Relations, um, looking ahead at the Chicago Council, Brent Iman is here, leading the round table on the global economy, um, which is doing a lot of thinking for us here in Chicago, and please come and speak with him during, um, you know, we are beginning to think very hard, or people are thinking very hard, about when there is a political opening, what do we, and we need to have, you know, we're not worth our salt in the think tank world if we don't have solutions to offer. So Mike, what are your solutions?

>> Well, we, we, like you, we are, uh, launching a whole series of efforts along those lines of sort of future of American strategy across economics, uh, defense, foreign policy, alliance management, adversary management, uh, nuclear, etc., um, precisely because, as you said, uh, um, we're going through, you know, a pretty grand experiment at the moment, um, a huge disruption, and at some point, and this is a non-partisan comment, whether it's, uh, whether it's this administration or whatever administration's come after, Republican or Democratic, we have to figure out what comes next. It's not likely to swing back all the way to where it was before, um, but it does not necessarily stuck to where it is now, and so we need to, I, develop options and have a more explicit conversation about what are the trade-offs, the costs, and benefits of different options going forward. And people can then debate, I'm comfortable with that trade-off. It's okay to pay more for for consumer goods if I feel like I've got a diversification of supply chains. You know, it's okay to pay more for national security. Like, let's have that conversation. That's a legitimate conversation to have by whatever party, uh, whatever party's in power. You look, I think on the trading side, you know, I do think, I think we have an objective of, we want to avoid chaos and anarchy. We, we know what happens. We saw it in the, you know, the interwar period when trade just becomes another weapon of, of, uh, of, of conflict between countries. And so I think we want to try and figure out how can you have rules without a fully multilateral rules-based system. I go back to open plurilateralism. For some countries, that may mean trade agreements. For other countries, like the US, it may not be in the, in the mood, uh, politically, to have trade agreement, like free trade agreements. It may mean gathering countries together around, what are the, what are the guardrails around industrial policy? How, how should we, what are smarter and less smart ways of subsidizing critical sectors? Uh, how do we think about export controls and, and keeping critical technologies out of the hands of our competitors or adversaries? Can we have a common approach, uh, to that? A common approach to foreign investment screening. So things that may not be about trade liberalization, but where international cooperation would be helpful. And I do think the last few weeks has been, I think, a positive sign. The, the Trump administration, President Trump was in Asia, signed agreements, some more of them are sort of letters of intent than real agreements, but with Japan, Korea, he had one with Australia as well, around critical minerals. So he's doing it bilaterally, but is a recognition that actually, America First does not necessarily mean America goes it alone, and we, there are areas where we need, and we would benefit, America would benefit from cooperating with allies and partners, and critical minerals, uh, is certainly a, is certainly an obvious one.

>> Ragu,

>> Uh, you're looking for solutions.

>> Well, yeah, as we begin to build some new rules or something, you know, what, yeah, solutions.

>> Some of the solutions are in, you, United States, some are elsewhere. I mean, we talked about China. I mean, China needs to figure out a model of growth which doesn't rely on the rest of the world. Uh, and, you know, you would think that given their vulnerability on, on this, they would, uh, they would think deeply. They're trying, but they need to see their real problem is overproduction now, and they need to think about how they fix that. Uh, for the US, or more generally for the developed world. I mean, the three, um, for the US specifically, the three areas where this administration has had enormous effect, trade, immigration, and aid. On these three, I would rather that we have as free trade as possible. Where you're stealing trade, where you're stealing production from, is not from the emerging markets, it's from other developed countries, which are in a similar situation. So, uh, US auto firms in, in Canada, thinking of moving across the border. That's not a hugely efficient sort of move. It's done just because of tariffs, and it is calculated to make a lot of friendly Canadians more angry over time. I don't think that benefits the US in the longer run.

>> You notice that the Canadians are angry because they're always.

>> We just hosted some very prominent Canadians last week, so we're feeling very friendly at the moment.

>> I, I would say on immigration, certainly, uh, there's a lot of angst about it. Of course, the way, uh, immigration has been slowed again, there's a lot of, um, anger about that. But the reality is, uh, as with every developed country, there is a concern, especially amongst the working class, about immigration, and some modulation, uh, for a little while, until the costs of aging become more real, and, and you do need to bring more in. Sort of trying to make that immigration process much more sensible, uh, bringing in the people that you need, in the quantities that you need, and making a persuasive case that it, it is in the national interest. Uh, I think a lot of work needs to be done there. It's not easy, but a lot of work can be done there, and certainly the first measure is to get control over the borders. I think every country wants to do that. It hurts the immigrants who want to come in, but it may be necessary to make immigration more palatable for, for the countries. But I think the third element would be, um, you need to keep investment in other countries open to create the jobs there. And this is where I think this idea of, we need all the investment to come to the United States. Japan promising 550 billion. I have no idea how they're going to do it. I think this is one of those promises which we'll see. Yeah, they don't. Uh, Europe, another 500 billion. I mean, these are, these are make-believe promises. They're not going to happen, uh, especially if the returns on that investment are going to be sort of, uh, appropriated to a large extent by the United States. I mean, who's going to do this? It's, it's not going to happen. They're going to wait out this administration and see what happens next. But I think the, the idea that you need to invest in the rest of the world so as to create jobs there also is not a stupid idea. It, it worked reasonably, not, not hugely, but reasonably. And it could work again if we could think of ways, especially given all the needs on climate, etc., etc. How do we make sure that we don't get massive migration from the rest of the world fleeing climate, uh, action? That, that's that's a

place where we could have a sensible, sensible dialogue. So, I'd say control immigration, uh, certainly do all the things we need to do to up the skill level in the population and all that, but we've been talking about that for a long, long time. Keep trade reasonably open because it's also what keeps him, uh, you know, people from migrating from their places because they have jobs there. Uh, and, um, you know, try and, uh, allow for investment across, across borders. This is, uh, you know, it's a little, little waffly, but, uh, you know, otherwise, I, I will say education, education, education, but we've been saying that for 40 years without, without, uh.

And we haven't even asked a question about AI regulation, which apparently the US is doing too much of, according to Nvidia. Um, okay, questions from the audience. Be succinct, intelligent, articulate, wonderful, as this audience always is. I'll come to the gentleman in the very front row. And I think there's a mic coming to you.

>> Andy Zanitus with the board of the council. Uh, fascinated by the open pluralateralism. But the unsaid part is the way the US is approaching it. It's all against China. And then China has for years, before the US started giving up on the world system and doing the Quad and all the rest, China was building the BRICS and the Shanghai Cooperation. And now we have, it seems, back on the table, assuming, uh, peace in, in the Middle East. India is on both sides of this debate. At what point will China or the US force the issue? Because it seems India is intent on rebuilding a, a one-party non-aligned movement, and it will either the US or China force India to to choose sides.

>> So, um, India's a great example, uh, uh, because you look back over the last 80 years and we had the, the Cold War, bipolar, pretty, in retrospect, pretty clean. Like we knew sort of what side you were on, and, uh, it was proxy wars in between, but there were two, two sides, and, and the world was sort of divided that way. That ended, uh, about 40 years afterwards, and we had a unipolar moment. It wasn't really US hegemony, but it was sort of the hegemony of American ideals, of of liberalism, of international, uh, liberal internationalism. That's over. You know, that, that, that ended, and the question is, what comes next? And some people think it's multipolarity. I have a different word for it, uh, which is polyamory.

Um, uh, I think we're in a polyamorous world, and India is the archetype of this polyamorous world because, just as you said, uh, and as, as Regu also alluded to, uh, India loves the United States for technology, for civil nuclear cooperation, for defense cooperation, for the Indian-American community and the entrepreneurship and the ability to build companies here in the United States. Uh, they love Russia for munitions and oil. They love Iran for oil. They love and they hate China, depending on the issue. They're scared of China's imports. They have border issues, but also part of BRICS. And so my guess is that neither US nor China is going to be able to force India to choose. India is going to have multiple, um, relationships. And you could say the same thing about Brazil and Indonesia and South Africa and much, I think, of the emerging, uh, of the emerging market. I think there'll be very few clear blocks, um, but a lot of complexity. You know, we, we're going to substitute sort of what we used to call the spaghetti bowl of free trade agreements with a new spaghetti bowl of these plurilateral agreements or of these polyamorous relationships. It takes a lot of diplomatic engagement to manage a world like that because you're creating coalitions almost issue by issue. Sometimes people, India will be with us, sometimes they'll be against us, sometimes they'll just be standing on the sidelines, and that, I think, is the, the challenge for the future administrations.

>> Um, two things. One, on the polyamorous world, uh, I've trademarked this, by the way. I wonder though, if the polyamorous world, who sort of deals with the conflicts? It used to be the US, the hegemon, who used to apply subtle pressure to, you know, bang heads together and and get them to fix things. In this multipolar world, it's harder, and, and nobody has the incentive to step out and do that headbanging. And so I think it's going to be a little more difficult to carry it on, but there's no alternative. Um, I think India, uh, would love not to make choices, you know, be be friends with everybody. But I think if you, if push came to shove, does it really sort of think Russia is a future? Does it really think that a strong relationship with China is the future? I think if you, if you just looked at values and and look at values beyond the current administrations in the two countries, I think there's much more commonality in values between India and the United States than between India and China or between India and Russia. And so, I mean, administrations on both sides need to build on that. When it, if it just comes down to transactions, which currently both, uh, the US and the Indian administration are very focused on, then the commonality becomes much less clear. But when you look at values, look at longer-term, uh, sense of commonality, I think the US is clearly India's long-term, uh, sort of partner.

And one more thing, which may just contradict everything I said before. Um, uh, if you look at the president's recent trip to Asia, one of the things he, one of the agreements he signed, which hasn't gotten a lot of attention, um, and comes closest to being a real trade agreement, is with Malaysia.

And one thing that was interesting in it, um, is we used to go to ASEAN. ASEAN would say, don't make us choose. We can't choose between the US and China. China is our neighbor. It's number one trading partner. And actually, the president's saying, actually, you're going to choose because if you go with China, we're putting the tariffs on you. And if we decide to put a tariff on China, we want you to put the same tariff on them. And if you join an organization that China runs, then we may put a tariff on you. And you have to choose. And so that's going to be interesting to see. Now, you can do that with a Malaysia. I'm not sure you can do that with a country as, as big and independent, as important as, as India is. Um, and India has far more options than smaller countries. Um, and so, but, but we're now entering a world, and I think this will come up in the USMCA too, when that's sort of reviewed, is we're, my guess is, we're going to tell Mexico that they have to have a common external tariff vis-à-vis China because we don't want Chinese goods going in through Mexico and coming to the United States. So more of a customs union where they agree to keep Chinese products out as well.

Oh, where is my mic runner? Anastasia, help me out here. Um, let's come a little bit further back on this side.

>> My name is Costas. I'm an attorney with Greenberg. I'm going to, you mentioned the, today's the US Supreme Court heard arguments on the constitutionality of President Trump's tariffs, and the legal feedback that that was after the, the hearing was that it sounded like many of the justices were leaning towards, um, uh, they were very skeptical about the tariffs being constitutional. If the court came down that the tariffs that have been imposed were indeed unconstitutional and invalid, what does that do to American trade policy, American foreign policy? What does Malaysia now say to us? Gave a great example. What does China and India say to us?

>> So, it, it affects the particular, these these AIPA tariffs, which were the sort of 10% or 15% tariffs across the board. Doesn't, doesn't affect all the tariffs that have been, uh, implemented, uh, if, if they come down that way.

I, so, um, uh, one, there'll be a lot of chaos. There'll be a lot of questions. There's a big question about, do they have to refund the tariffs that have been collected or not? You know, and my, I'm not a, a Supreme Court watcher. Um, uh, but there are lots of ways the court could, on one hand, say that's an inappropriate use of AIPA, and on the other side, sort of give the administration a fair amount of leeway of how they deal with this going forward. I actually think if the president is determined to put tariffs on, he's got plenty of other delegated authorities. 301, 232, 122, 338. These are all provisions of, of, of, of the law, of trade laws that give the president authority to impose tariffs under different circumstances for different periods of time. And I think most other countries recognize that. And so I don't think it's going to lead to everybody saying, "Oh, forget it. We're not talking to the US anymore." Because they know, even though it'll be more inefficient, it'll take more time. There's more process that's required by US TR, by the Commerce Department or others. If he's determined to put tariffs on, which I think he is, he'll find a way to do it. So my, my guess is other countries will say, "Okay, we're not tearing up all of our agreements." You know, maybe gives them a little bit more leverage to try and get something, you know, better than what they had before, but we're, we're going to be in a higher tariff world one way or the other.

>> Towards the back in the middle. Yeah, that's not very descriptive. Thank you. Um, this is my first council meeting. I appreciate it. Don Casey, professor of internal medicine at Rush. Um,

>> Fabulous.

>> I had the, you didn't mention Belt and Road, which is another topic, but that's an issue for me. Um, but I had the good fortune in 1996 to have dinner by serendipity with Finance Minister Manmohan Singh after the Rob, after the Rajiv Gandhi celebration of Indian independence, which is in August for those of you who don't know. And I asked him very quickly what he felt was the number one problem in India, and in a split second, he said power. So fast, fast forward to today, having listened to a National Academy of Science and Engineering and Medicine topic on the infrastructure relative to AI, which is really the not the mammal in the room, but the dinosaur in the room. How do we handle the demand, the exponential demand for electrical power? Pick your poison. Um, and, uh, what similarities are there between the three countries that address this problem?

>> Big question. Who wants to go? Ragu.

Well, uh, um, I think incrementally, uh, both India and China are bringing a whole lot of renewable energy on board. Uh, solar is, is one of the cheapest ways of adding, um, you know, uh, to power in, in India today. Uh, that doesn't mean the old coal plants are shutting down. They're still running. But it, it would be silly to invest huge amounts in coal at this point. China is still opening some coal plants, but they too have, uh, an idea they'll get to net zero, and they probably will because their investment in renewables is huge. Uh, I think for the United States, I think Mike will probably have a better answer than I have. Uh, uh, certainly there's a, a huge amount of, uh, investment being contemplated in, in, in power. I think the, the, the one question I have is this all takes AI based on current technology, right? That, that more compute is needed, therefore more power is needed, and of course, inference will require huge amount of power, and this is all going to get rolled out quickly and so on. Uh, the big question is, you know, is all this on the cards? Uh, are they, are we going to find a less costly way of, uh, of training the models? Are we going to find a less costly way of doing inference, which may require much less power? I don't know. Uh, but it's, it's, uh, certainly what, what is, is built out and what people are investing in 5, 10, 15 year power plants to to accommodate at this point.

No, I agree with that. I think the, uh, certainly on the path, the current path we're on, there's this insatiable demand and incredible demand. The figures are astounding how much more energy we're going to need. And we're fortunate in the US to be now, I believe, the number one oil producer in the world, the number one or two natural gas producer. And issues that were sort of shelved for a long time, like nuclear power, are back in fashion. And so there's a lot of talk about new plants, opening old plants, small, uh, small modular reactors. Even fusion, which has been on the on the on the drawing board for decades, you know, there's a lot more enthusiasm that we may finally be getting close to commercial scale fusion. And so, um, it's unleashing a huge amount of activity and also a huge amount of activity in terms of how to manage power for these giant data centers. Until we may be in a new world where we may not need as much power and, and we've done inference in a different way, or the chips are powered in a different way, so, you know, through photons or other ideas that are out there that that may change the dynamic. But, uh, for right now, it is, it's, I mean, that the hundreds of billions of dollars that are being committed for hundreds of billions of dollars for energy infrastructure to power these, largely the AI, uh, sector is really astounding.

>> And, and just on that, uh, issue, I mean, this is where China and the US, uh, the US has its own energy sources, gas, oil. Uh, China has a much better record of building nuclear plants over the last so many years. Now, I don't know about their safety, not a nuclear expert, but the question is, have they figured out how to do it fast, which, uh, you know, Western countries are still trying to figure out, you know, how do we build it in 20 years? Uh, and, and the other place they have a lock on is, is certainly renewables, wind and solar. They have some of the most efficient production, uh, technologies there. So there may be gains to trade there, but of course, you have to worry about dependency also, and how do you, how do you deal with that? Energy is going to become, as you said, one of the big issues going forward.

>> We're coming to the end. We're at the end. I'm going to ask you one final question, really short answer, um, just to kind of draw it to a close. If there is a change of US, when there is a change of US leadership after the next election, and if it is, uh, if the next leader is from the other side of the aisle, how much will US trade policy change? Um, I'm going to let you go last because you're the guest of honor from out of, uh, town.

>> Ragu.

>> Um, I think there's, uh, I'm going to give the economist answer. It depends. Uh, I, I think you want to see, Brexit showed up in the numbers 5, 6 years after Brexit happened, right? Uh, then you still saw the effects on the United Kingdom. Depends on how fast the effects start showing up on on growth. If, if they start showing up, there's a sense of, uh, maybe this wasn't such a great idea. Uh, I think then there may be some push to reverse it. If it's mild and not, not very noticeable, it's very hard to pull it back, uh, for the US because that means still more disruption, but it also means it will, there will be vested interests who've sort of invested based on the tariffs, and they will fight to keep them in place rather than let them remove, be removed.

>> I, I agree. I think there's likely to be less change, maybe at the margins. Some of the more extreme actions, the tariffs are easy to put on and hard to take off for all the reasons that Ragu said. You get constituencies of interest pushing for them. And when you take them off, you're seen as being weak on trade or weak on China or, you know, not defending America. And so, you know, the Biden administration didn't take off any of the first Trump administration's tariffs and added a few on top of them. Um, uh, and it's still sort of unclear whether they would have, whether they made sense, uh, or not. That's the domestic answer. I think the international piece of it is, I, I don't, you know, I don't think we're going to see a revival of the multilateral trading system, um, unless and until the major economies have a consensus about how the global economy is to be structured. And right now, we're not having that conversation with China. We're not really talking about the drivers of our differences over, uh, over economics. We're talking, I mean, it's kind of remarkable if you look at the last summit meeting, it was, uh, fentanyl, soybeans, and TikTok. Like, how did the, the relationship between the two most powerful countries in the world come down to, you know, a social media platform, a drug, and, you know, and, and one egg product? So, but that's what, that's, that's considered progress. So, we have a long way to go until there's a consensus. If there's a consensus, then you might see the rebuilding of a system.

>> This has been tremendous. This is what expertise looks like. Um, thank you for, for sharing your expertise with us, two extraordinary minds on many things, including trade. Thank you for making the trip, Mike. Thank you very much.

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