Trade, tariffs and protectionism

David Lowe: This podcast is about Trump and tariffs and the excitement that Trump has introduced into our world over the weekend. We have brought together two international trade lawyers to discuss it. My name is David Lowe, I lead our commercial contracts team and my focus is on international commercial contracts cross-border supply of goods and services.

Bernardine Adkins: Well thank you David. My name is Bernardine Adkins and I am the Eurotrash part of this team today and my focus is more on the regulatory aspects of trade and having lived for many years in Brussels also I am always very interested in from an EU perspective as well as the UK and US.

David: So Bernardine, today, Wednesday 5 February, the last five days a lot has happened. Tariffs in, tariffs out. Where are we today?

Bernardine: OK, so those of you who were watching the news Saturday, tariffs announced by President Trump of 25% on Canada and Mexico followed by then a later announcement of 10% on China. With respect to Canada and Mexico, the accusation was that they were failing to curb immigration and also, as with China, they were failing to stem the flow of Fentanyl, which is a very, used recreationally, a very very nasty opioid.

David: And then what, the world held its hands up in horror on the Sunday and then on Monday, I think it was.

Bernardine: Yes, kept changing around. So there was basically Canada and Mexico have had a reprieve of a month while they are trying to address these issues about immigration and Fentanyl, and some people have actually said this is not so much a trade war as a drug war. So, who knows. Do we have a genuine trade war here, is this really about trade or is this really that Trump is wanting to be seen to deal with these problems, these issues of immigration and Fentanyl? Contrast China, they still have the 10% on the trade there which actually query whether China should as a favour because during his campaign Trump said, President Trump said that he would impose a rate of 60% on all Chinese goods.

China has responded in a measured fashion, so it has imposed tariffs in a measured way, as one generally tends to do in a so called trade war what you tend to do is OK how can you tactically proportionally respond to putting it crudely "hurt" the other side without hurting your own economy. So what they have done is they have imposed tariffs of 15% on US coal and liquified natural gas while they have put 10% on crude oil, agricultural machinery, cars, pick-ups. So it is about targeting about £14 billion worth of goods, about 10% of US trade.

But also, and I think we are going to increasing see this is a more sophisticated approach to this tit-for-tat trade game warfare, whatever you want to call it, in it is not just about crude in position of tariffs on goods, you are also looking at services as well. So Beijing has indicated it is going to launch an antitrust probe into Google. Google has already had its search engine blocked in China.

Also we are seeing export controls, not just tariffs, which is interesting. On things people want, on rare earth. So China has put export controls on their rare earths, effective immediately. They have also added a couple of US entities to an unreliable entity list.

So as I said, we are seeing a more sophisticated measured approach from China and we will see what pans from that.

David: And of course it is hard to predict the future is it not. Nobody is really knows what Trump is going to do next.

Bernardine: As ever, he would say that is his "Trump card", excuse the pun, sorry a dreadful pun, dreadful pun.

Yes. Things are still very much evolving. He has only just now nominated who he wishes to be the trade representative, a gentleman called Jamieson Greer, who was the Chief of Staff to the previous US trade representative during the previous Trump administration. A chap called Robert Lighthizer and he is a lawyer, so maybe we should be thankful for that. I do not know, it depends on your view of lawyers, but in terms of him understanding the notion of the rule of law and trying, if you can, to respect WTO rules. But he has got quite an interesting background. He spent, as a youngster, I think from 1998, two years working as a Mormon missionary. Guess where David?

David: In Salt Lake City?

Bernardine: No, Brussels.

David: Brussels!

Bernardine: I mean talk about the triumph of hope over experience. So he has got some idea of how good the food is in Brussels, if nothing else. Then he worked briefly, just for two months as a clerk in the European Court of Justice in 2017.

But he is, I do not like these cliché, but he is described as a hawk, very much aligned with the Trump notion of US has been wronged and we are going to use trade tariffs as an instrument to try and leverage some form of economic advantage.

David: OK, so Bernardine we do not know what tariffs and we do not know when and we do not know which countries, but it feels pretty certain to me we are going to have tariffs of some description.

Bernardine: Possibly, but as I said earlier we are in a much more sophisticated world than that and the EU, I would image, it will try and respond in a measured proportionate way whereby things do not escalate and get out of hand and in Trump one it imposed as before tariffs in areas which would arguably be more symbolic perhaps, will hurt America but not hurt the EU. So for example, it imposed tariffs on Harley Davidsons and Levi Jeans of all things.

David: Bernardine you are going to lose out there.

Bernardine: I buy Vinted, please.

So now it has tooled up, it has got this thing called the Anti-Coercion Instrument which came into force in 2023. With this it can aim its sights at the big US tech giants essentially. So it has been used more recently against China and it gives a whole new smorgasbord of possible instruments that the block can use as against any country that it feels is inappropriately using the trade rules to gain inappropriate leverage.

So it could do things like block the commercial exploitation of intellectual property rights, software developments, software downloads, streaming services. It can block foreign direct investment, restrict market access to banking insurance and whole range of different possibilities are there.

David: But is not the EU usually really slow?

Bernardine: That is … you have been reading the Daily Express too much I think there, David. Yes, that is a cliché, but if you look, when it needs to act fast it does and if you at what happened during COVID it moved quickly there, but also more recently with sanctions. Invariably the EU were certainly acting faster than the UK. The UK were about to do a press release and we would all be sitting there fiddling our thumbs, clients desperate to know what was going on, whereas we would have already of had something would have happened in the EU and also we got guidance, we got fast guidance.

27 member states but we got a lot of guidance out which made it a lot easier, in fact, for companies and businesses to understand where they were. So all of those misnomers, when the EU needs to act on this it can. Also I think it realises it needs to move fast on this, it needs to move fast. Because of course with this instrument, for example, anti-coercion, it needs to get a consensus.

We saw more recently renewed with he sanctions going on with Ukraine which some people said maybe it would not happen, and it happened. So I think they will move if they have to.

David: So before we carry on exploring that big world of international trade policy and there forth. I think it is probably worth just a few comments on here and now of contracts, which is obviously my area. Because I was thinking over the weekend what would I be concerning myself with?

I mean, obviously the starting point is looking at who in a contract is going to be responsible for changes in currency and duties in the contract. I mentioned currency there, that is not all about tariffs. Tariffs then have currency consequences that the dollar has got a lot stronger and so depending on which side you are of that and the impact it has on the currency of the contract, that is going to be relevant.

So it would obviously be sensible in significant contracts is to look at who is going to be responsible of duty changes, who is going to be responsible where currency is changing. For currency obviously making sure the right hedging is in place.

But that is very loyally is it not, looking just at the delivery point the contracted incoterm for delivery, if you sold DDP incoterms 2020 that means the seller is responsible for export and import duty. But I am being a lawyer there by looking at the end. Obviously there is a supply chain behind that where duty is going to come up as a cost and so people's procurement team should be working out where are we vulnerable to duty increases on the price of goods and if the price of goods then go up what does that mean for the contract?

A question I am often asked at times like this is will not the force majeure clause get me out of jail. Can I not just step out of this contract that has now become onerous because I cannot afford the increase in the duty in the supply chain and the answer is well it will depend. Depends on the clause, but probably it will not protect you. The way and English court looks at a force majeure it is an allocation of economic risk between the parties. So if one party says hey I will take the currency risk, hey I will take the duty risks, then the courts can say well you take that risk, you cannot use a force majeure clause to get out of jail.

Some contracts have economic hardship clauses. Quite, you see that more often with continental legals systems, so that might help. The change clause, if there is a change clause, a price review clause, some kind of mechanic to adjust for price changes, that will obviously work and that will be most effective.

One final thought is just thinking about how tied in you are and how tied in you want to be with your supply chain. Do you want to have it all tied in and so your suppliers are taking some of this duty risk and you have got them nailed down, but then you are not flexible. Or do you want to be flexible and fleet of foot and go actually instead of sourcing this component from France, I am going to flick and I am going to source it from Uruguay. To you want that flexibility, are you confident enough in your supply chain to be able to make those changes which allows you to be flexible. These are really difficult commercial decisions organisations have got to make and really difficult in an environment where none of us really know what is going to be happening next.

Bernardine, I mean, I mention there changing your supply chain and sourcing from different places. I read a bit about China plus one strategies, so people selling into the US wanting to avoid China tariffs going hey I am not going buy in China I am going to buy Vietnam instead, what would you think of that?

Bernardine: I think in that case you need to be quite sure of the origin of those goods. So query whether they are circumvented, they are actually of Chinese origin in which case even if they are traded through Vietnam, they are still going to be subject to US tariffs. Or worse still you will be accused of circumventing the tariffs that should otherwise apply and that is not a good thing in terms of reputationally and also in terms of being hit by anti-circumvention duties as well.

So I think in such circumstances it is important that people are very aware of the origin of what they are buying and are sure of that. But I think businesses are getting used to having to do that to be very certain of its own supply chain in terms of having to comply with environmental standards, for example. So it is just another racket in that need to be certain of the origin of what you are purchasing and do not really think about, it is not worth thinking about circumvention because of the consequences. You are better off paying the tariff in the first place frankly.

David: I imagine it gets quite complex. I imagine if you are buying a consumer appliance from Vietnam and Vietnam bought the raw steel from China, that is not going to be an issue, but as soon as you are buying the components I imagine it gets all really difficult.

Bernardine: Yes, there is a whole world of pain that opens up in terms of what is the origin of that product. There are well established rules as to what the origin is and a small mini industry trying to work out and if you are very sophisticated players you should have in-house people who are able to work that out, but it is interesting at Warwick Market, there is a guy there who imports these wonderful coffee beans, so of course I said to him, how do you work out, and he imports it, how do you work out the different origins and tariffs and stuff. He said the amount of pain and work that I have to do, I just pay the tariff. So some people may just decide to do that.

Because what is interesting is that again it is well established by economists, it was well indicated in Trump one those tariffs were passed on down to the American consumer. So you may find what happens in practice people just pay them, depending on upon the dynamics of the US markets. Also, as people have pointed out, this is a much more inflationary world than it was before and that will hit them harder than it did during Trump one time, it was not a time of such high inflation.

David: yes, which is the challenge is it not is that Trump seems to have this nostalgic view of America where it is its own economy and self-supplying, which if you can achieve that OK, but at what cost. I think it is really interesting is it not about how the Argentinian president has just scrapped tariffs, he is referred to as the Trump of South America, but he is doing the very opposite because he is seeing the pain of having tariffs on the local population where they are paying more for goods then they need to and he has scrapped them, very opposite of Trump.

Bernardine: Yes, it will be very interesting to watch actually, it is almost a natural experiment, what happens if you scrap it completely.

David: Where does the UK fit into all of this Bernie, we are going to have a free trade deal are we not?

Bernardine: Yes, of course, that would be nice. There has been some comment, the expression I heard was orphans in the storm was one commentator and there has been a lot of media comment on the notion of a UK/US trade deal, which in my view is very naïve, if not to put it more extremely, one for the birds. I was always surprised by how much talking up there was of how far the UK was last time round they had four rounds of talks and they are really going hell for leather, because in any trade deal it is the old guns and butter, you have to put something on the table to say OK you are better at 'X' than we are, come on then we will give you free access to that.

But the obvious thing for us would be agricultural and food, but we have the issue of food security because nowadays people are far more aware of defence issues. Are we really going to open up our markets to that and comprise our farmers, our agriculture, is there going to be the public appetite to allow that to happen? So I am deeply sceptical as to whether that will happen in any real time.

What I also think is interesting just to look at that from the experience of the US and, if I could just read an excerpt from Robert Lighthizer's book who, in good faith because he is a great believer in these open free trade agreements, so he started looking at this possibility when post-Brexit, Boris Johnson was Prime Minister and he mentions that my counterpart was UK trade minister Liz Truss, she said in an equally ornate office somewhere in the bowls of Whitehall, I always enjoyed talking to her, she went on briefly to become Prime Minister.

He says, we have such a health trade relationship with the United Kingdom, I was a little sceptical as to how we were going to be helped by a new deal, clearly the British wanted tariffs reduced, in particular this was a reduction in auto out tariffs. Then he said, US, we already had a large deficit in this sector and I did not want to add to that and risk more US jobs. As we began to prepare our strategy I call the COs of a few large US manufacturing companies, I ask them what I could do in a trade deal that would help them sell more products in the United Kingdom, the answer was not surprising, with the exception of Ford, it thought it could sell a couple of thousand more mustangs, remember with left hand drive in a right hand drive country, none of the company bosses could find anything that would move the needle. The existing UK tariffs were mostly small and the businesses had already established patents. It goes on to say an awful lot of car industry was in the EU anyway from the US perspective and the same was true for chemical companies and others.

People actually, culturally as Britain, we are actually quite low on tariffs, we have already in many ways given away what we would be putting on the table in terms of any trade agreement. Also, what people fail to realise is under, and it is fundamental to the world trade, or the WTO agreement, is that it is a principle of the most favoured nation. So if you give any country a trading advantage, you must offer it to everybody else. That was put in place to protect the smaller countries. That is fundamental to the trade order. The only exception to that is when you basically have a free trade agreement which covers largely most of the economy.

So either we go all in, bust, full free trade agreement with America or we do not, or we grant whatever advantages we give to America to the rest of the world.

So we have seen announcements oh there is a trade agreement agreed here, a trade agreement there, they are not free full trade agreements, they are discussions, workshops, something on investment, something on a bit of technology, but not a full fat free trade agreement. So I think there is so much I think, disinformation around on this. Also we need to remember what a massive economy the US is compared to us. What I find quite interesting is that Jamison Greer recently, the would be new US trade representative, he said his appetite, where would he be interested in free trade agreements, he suggested UK, Kenya, Philippines and India.

Those are four very different economies and just a part of me just thinks are we going to get picked off here, because, you know we had the TTIP discussions a few years ago, which have gone on for many years and they ended in, I think they started formally in 2013, formally closed in 2019 and they basically hit the buffers on the difference we have in terms of regulatory standards and approach as between the US and the EU and the UK has a very similar approach to the EU, we have pretty stringent standards. I am not saying that the US has low standards, but they are different.

So fundamentally, so where as the EU and the UK has that now as well, we have the precautionary principle, in other words if there is something that may be harmful, untied untrusted, we do not allow it to happen until such time as it can be established, this may hurt you. Whereas the US has the opposite. They say until it is proven this thing is going to hurt you is carcinogenic, we are going to let it rip. So that is a very very different mind set to regulation and that is where the EU hit the buffers with the States.

But what I also find fascinating is that, and the labour party went along with this, is that Britain has joined the CPTPP which is the trans-pacific agreement because that was very largely set and put together by the States as a buffer vis a vis China. Ironically the States have pulled out. But that was very much to get US regulatory thinking permeating around the pacific. I do not know, maybe it is a conspiracy theory on my part, that I think is why the right wing pushed to put us into a very very different regulatory mindset from that of the EU which is a higher consumer standards.

So, I know it is a political question as to how things will pan out, and obviously the more we adopt that US style of thinking the harder it is going to be for us to reconnect with our closest trading partner, because lets not forget 41% of our trade is with the EU, 21% is with the US and that is quite a big difference.

David: So Bernardine this really complicated and uncertain world, which is getting more complicated and uncertain because President Trump brings out unpredictability. If you were a multi-national manufacturing company with plants around the world, how would you be responding to President Trump's rattling of tariffs and so forth?

Bernardine: Yes, I would be, to say a very British expression, it would be keep clam, carry on. I think people really need to hold their nerve because we have seen, it is an object lesson to us all as how quickly things flip and change. There is a world of disinformation out there, so it is really a question of being sceptical and being really really inform yourself as to what really is happening. But I would say to people do not do anything in a hurry because things are changing and flipping so quickly. Plus there is a new expression, there is an expression of insure and basically have your suppliers near you, but I love this new expression of friendshoring, it is like OK you may be exporting or importing from abroad, but make sure you are doing it with people who are trustworthy allies, you know that they are not suddenly going to flip on you, you can be sure of over at least the short term medium term.

David: I am sure that is what Denmark and Greenland thinks about its reliable ally of the States and President Trump of offering to take Greenland off them as a reliable friend, how things can change.

Bernardine: Yes absolutely.

David: Well thank you very much Bernardine and I hope you have enjoyed listening to this discussion about the impact of Trump and tariffs over the weekend. I am sure you will be hearing more from us as the position becomes clearer through Trump's presidency.