Trade War Turbulence and Clean Energy

Guest

Jason Furman

Aetna Professor of the Practice of Economic Policy, Harvard University

Transcript

Jason Furman: It might be the case that you want to have all the solar stuff or the batteries built here in the United States. I would much, much rather subsidize them rather than put tariffs on them because you are making it really expensive. In the short term, you’re guaranteeing yourself a very painful, slow transition. I’d rather do more that’s building us up rather than trying to tear China down.

Jason Bordoff: It’s hard to overstate how consequential President Trump’s liberation day tariffs have been for American economic policy. The economic pressure that President Trump had been exerting for months evolved into a trade war while the administration has paused the steep reciprocal tariffs that announced on other trading partners, excluding China, a flat across-the-board 10% tariff remains and China has retaliated and raised tariffs on all US goods to more than a hundred percent.

Some fear the trade war could have a seismic impact across the American economy, including on clean energy. The exceptionally high tariff rates on China in particular could have significant impacts on clean tech products like batteries, solar panels, and wind turbines.

So what are all the possible outcomes? Do our trade deficits or our national security priorities necessitate a trade war? What would a turn away from globalization mean for our efforts to confront climate change? And what does all of this mean for the future of industrial policy in the United States?

This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff.

Today on the show, Jason Furman. Jason is the Aetna professor of the practice of economic policy at Harvard University. Prior to his appointment at Harvard, he served as a key economic advisor to President Obama, including as chair of the Council of Economic Advisors. Jason played a key role in implementing the major economic policy initiatives of the Obama administration, including the American Recovery and Reinvestment Act and the Affordable Care Act.

Jason joined me to discuss the current economic uncertainty and we discussed the possible repercussions for businesses confronting the highest average tariff rate in more than a century. We explored why Jason thinks tariffs are a bad way to stoke a resurgence in US manufacturing, and we talked about his recent Foreign Affairs article, which offered a critique of the Biden administration’s economic policy.

We recorded this podcast on Friday, April 11th. I hope you enjoy our conversation.

Jason Furman, welcome back once again to Columbia Energy Exchange. It’s great to see you. I know how busy you’ve been explaining the global economy and tariffs to people the last couple of weeks, so I appreciate you making time to talk with us.

Jason Furman: I’m thrilled to be back with you.

Jason Bordoff: So I think I had asked you to be on this when I saw you about a week ago, and we had imposed sweeping tariffs on lots of countries all across the world because of the trade deficit we have with them. But now those reciprocal tariffs are gone back to a 10% level other than China. So maybe you could explain for people, assuming that’s where we are, when this comes out a few days from now, how have people responded to that action the Trump administration took? What lessons are people taking markets, taking companies that you’re talking to, financial executives you’re talking to, what lessons are they taking and are we kind of back to normal now or far from it?

Jason Furman: We are very, very far from normal at this point in time. Average tariffs were two and half percent going into the second Trump administration that included all of his tariff increases in the first term plus some small ones that Biden added on top of it. So we were at two and a half percent average tariff rate. We’re now about 20% average tariff rate, massively higher than we were before. The reciprocal tariffs included 10% across the board, but that was already on top of sectoral tariffs like 25% for autos, steel, and aluminum. He did cancel going above 10%, but then went all the way up to 145% on China, and the increase on China was basically just as large and important as the decrease was on all the other countries. And so the tariff rate we have now is the highest in over a hundred years.

It’s the highest of basically any country in the world other than a few very small countries, and it has an enormous amount of uncertainty. President Trump has continued to issue tariff threats to Mexico. The rest are slated for 90 days. He’s reiterated some of the sectoral tariffs like on pharmaceuticals and semiconductors. So it’s not just that tariffs are really high right now, they could go up again or by the way, they could go down again. Either way it counts as uncertainty if you think they might fall, that can also lead you to hold off on making a decision. So where is everyone right now? There was this moment of relief on Wednesday that yes, the president does care about financial markets. He is going to look at the bond market, but I’ve talked to executives who say basically it’s sort of 80% as bad as it was at the height of it, and there’s still so much uncertainty, so many costs that they’re going to be holding off on investment decisions, moving plants and equipment any which way, mergers, et cetera, et cetera, until they have greater clarity. And I don’t exactly know when anyone is going to greater clarity.

Jason Bordoff: And the impact of that uncertainty. You wrote a piece in the Financial Times a couple of days ago about how that uncertainty itself is an enormous drag on the economy. How do you think about that?

Jason Furman: Yeah, so uncertainty for a lot of laypeople sounds like what’s the chance that something bad happens? For an economist, it’s just variants in what could happen. It could include good things or bad things. So right now for example, there’s a 25% tariff on autos. Jaguar has suspended its exports from the United Kingdom to the United States that includes Land Rover, other types of cars. They suspended those exports. Why? Because they’re betting that maybe that 25% tariff will go down. And so in this case, there’s uncertainty about a possible, what I would consider a good development, lower tariffs on the auto sector. But that itself has repercussions. And this is something that you didn’t need economists to figure this out and study it, but they figured it out and studied it and business people knew it already, that when you are making a large lumpy, irreversible decision, it can sometimes pay to lose money for a month or two or three while you collect more information rather than locking something in that may result in a big loss depending on the uncertainty. And it doesn’t take a lot of businesses to make this type of decision to send an economy way down or into recession.

Jason Bordoff: I mean, businesses make important investment decisions all the time in the face of uncertainty. Is there something different about this or the scale or the magnitude of it?

Jason Furman: Yeah, so first of all, there’s the scale and magnitude. 145% tariff on China, for example, is an exceedingly, exceedingly large change with the country. You think of the microchip factories that shut down or had difficulties during Covid in Asia, and now it’s an entire economy is almost embargoed. Now, some of that stuff they can shift to Vietnam, and Vietnam can add a screw, and now it’s a Vietnamese export at a 10% tariff rather than Chinese at 145. So it’s not like there’s no way around that at all, but the ways around it take time. They’re costly and not everything can get around it. So this is just a lot of uncertainty. And then at the same time, it’s causing uncertainty In financial markets, equities are generally about 15% down since the beginning of the year. Bond yields have been rising, the dollar has been falling. All of these are things that matter to companies and corporate decision making as well.

Jason Bordoff: And you said a moment ago that the increase in China was as consequential as the decrease in all the other reciprocal tariffs, the elimination of all the other reciprocal tariffs. So why is that? Do you mean in macro terms just given how large a trading partner China is?

Jason Furman: Yes. So literally, if you just do a static calculation of the magnitude of Chinese imports times the value of imports from China times the value of the new tariff, the extra revenue from that is larger than the reduced revenue from canceling the reciprocal tariffs on all the other countries. Now, I did say static calculation because we are going to import a lot less from China. Those imports are going to come in through Vietnam and the like. So it’s a little bit, one way of calculating it, it’s actually it’s an even bigger tariff than there was on Liberation Day. Another way, once you take all the adjustments into account, it probably is a bit lower than we were on liberation day. But those adjustments themselves are costly, problematic and take time.

Jason Bordoff: Do you have any expectations of what we see in the next 90 days? I mean maybe nobody does, including the Trump administration. I don’t know. I guess we’re negotiating deals with lots of people now and we’ll see what happens with China. What’s your best guess of what unfolds?

Jason Furman: Look, the three things to look at are number one is the 10%. That’s right now on basically every country in the world. I say basically because Russia, Belarus, and I believe North Korea have been spared, but we don’t really import much from them. So that’s more symbolic than consequential. But anyway, the 10% on basically every country in the world is that set. Does the Trump administration think that that is a permanent revenue raising global rebalancing feature of our system? If it is set, one that’s problematic for our economy and two, it’ll make it hard to get a particularly good deal. The idea that another country is going to give us a lot of stuff in exchange for only having a 10% tariff when prior to this they had maybe a 2% tariff is a hard place to be. So that’s question one. I tend to think the 10% will stick, but it’s a big thing to look at.

The second thing to look at is China 145%. To me it’s unimaginable that we could continue to be at that tariff rate and China has tariffed the United States above a hundred percent as well, but it’s also unimaginable how the United States and China are going to figure out how to deescalate from here. So my guess is some which way that comes down, but I don’t know. And then the final thing is are there any new tariffs, tariffs for countries that buy Russian oil tariffs on pharmaceuticals and semiconductors? Is this weapon being used over and over again or does it look like the president hit his high watermark and from now on he’s peeling it back? And that’s quite important because that says, could tariffs go up or down or is the signal that we’re at the ceiling and from now on they stay here or go down?

Jason Bordoff: Are you picking up any insights into what you think might happen in other countries in terms of retaliation? I saw a comment that European Commission President Ursula von der Leyen made to the financial times about the possibility of levies on US digital companies, which is a pretty potent threat and something I know the tech industry is worried about or you think people are just keeping their head down, they don’t want to escalate this, as we see with China.

Jason Furman: There’s a lot of thought in other countries into how to intelligently retaliate. So I don’t expect a lot of across the board retaliation, but more saying, what can we do that will harm America more than it harms us? And that doesn’t just need to be tariffs. And a digital services tax is a very good example of that. The Chinese antitrust investigation of Google is another example of that. In Canada, for example, putting tariffs on bourbon is a way of telling people, if you’re Canadian, you have a choice of Canadian made rye or American made bourbon. They both taste gross to me. So there’s no real difference, at least for somebody like me, there wouldn’t be, but one of them hurts the United States quite a lot and it hurts in a politically sensitive way. So I expect that, but I don’t think we should totally undersell the leverage the United States has.

We’re a big rich country. We’re a really, really important market to a lot of countries around the world. And so there are some places where you could see easier deals. The UK, Australia, Japan, maybe Vietnam, and there’s some countries that are highly motivated to reach a deal of which in the list I just stated, Vietnam is probably at the very highest of the motivation. So they do have some leverage. If you’re willing to basically shoot yourself and shoot the other person and you have a credible threat that you’re going to shoot both parties again, and people believe that you’re willing to undertake that pain, you’re going to be able to get something. I don’t expect the things we get are particularly valuable or will make America great again. But I don’t think there’ll be nothing from a lot of these countries, either.

Jason Bordoff: You made a joke about how bourbon doesn’t affect you. It’s not your cup of tea. I’ll teach you what you’re missing the next time we get together. But for most people, how are they going to feel this? I would.

Jason Furman: Have a cup of tea with you.

Jason Bordoff: For most people. If you’re a coffee drinker, the basic goods you’re buying day-to-day on Amazon or in Walmart? Is it huge purchases like cars? Is it all of those things? How are people going to feel this and what timeframe will that take place in?

Jason Furman: So people, if the tariffs stay at the current rate, will pay thousands of dollars more. There’s different estimates out there that range from about $2000 to $4000 a household. The timing is trickier. So take the auto companies, Stellantis and Ford have actually kept prices the same or cut prices. GM has kept prices the same. In part they want to keep their market share. They have all the workers they’ve hired for this year, they want to keep those factories working. And in part, the president and the FTC have basically threatened them. Don’t raise your prices. That’s something I can picture them doing for some period of time. I don’t know how long that period of time is. I suspect it’s measured in months, but six months from now, I don’t think they can afford to be paying 25% more tariffs and not have passed that cost on other things, I think will end up happening in a much faster way. And you cited the example of coffee. Bananas, mangoes…there’s a whole bunch of stuff that is getting tariffed that we just can’t make – tea – we just can’t make in the United States. I mean we can make a little bit of it, which can’t make nearly enough to satisfy what Americans want to consume. So it’s just bizarre and pointless to raise the price of things where I don’t think anyone out there has a theory behind why it would make sense to do that.

Jason Bordoff: Yeah, I bought a few months supply of coffee last week just in case. Now talk about why we’re doing this in the purported rationale. These are to address the problem of trade deficits. So for people listening, explain what trade deficits are, why do they occur and are they a problem?

Jason Furman: Yeah, I mean this topic is maddening for economists because it’s one place where we are reasonably confident that we have the answer and that we’re thinking through a whole bunch of steps and links and other things that no one else is. I contrast that with other aspects of trade, trade and inequality, trade and national security, trade and disruption, winners and losers effect on areas. I think all of those questions are really quite complicated, are open issues, and I could see either side of them, but when it comes to trade deficits, it’s just the wrong way to think about it. It’s the way people thought before Adam Smith – evidently some people continue to think after Adam Smith – that your goal as a country is to accumulate as much gold as you possibly can as opposed to having as many productive factories as you possibly can, generate as much annual income as you possibly can and have people with living standards that are the highest they can possibly be.

That’s what you should focus on in the economy. Germany’s a great example of this. They run really big trade surpluses every year. One way of looking at it is they’re taking advantage of the world and getting rich at everyone’s expense. But look at Germany, their growth is basically zero. They’re not in a great economic shape and part of that actually is because of their trade surplus. So why is that? The trade balance is also equivalent to the difference between how much a country saves and how much a country invests. And this is something that we’re a hundred percent sure is true. It’s a mathematical identity and it comes about because if you as a country want to save more than you invest, you have to take that extra money and send it somewhere. You send it to someone else and they use it to buy your products.

And accounting wise, that trade balance ends up equaling the balance of capital flows. So in Germany, they have a high level of saving, but more worryingly, they have a low level of investment and they are rather than enjoying themselves by consuming rather than creating a better future for themselves by investing, they send all that money abroad. The flip side of their trade surplus, they would be better off both today and tomorrow if they could get their surplus down. Now you look at the United States, where does our trade deficit come from? It comes from all the capital flowing into the United States. Partly it’s flowing in for a good reason. We have really productive terrific things that we’re investing in the United States in the energy sector, which you know much better than I do. In data centers, AI, all of that. And so this foreign money is fueling our investment.

Part of why we have a trade deficit though is a bad thing, which is that the government’s running a big budget deficit and that forces us to borrow from abroad. And again, they get the money to lend to us because we buy things from them on our trade deficit. And so there is an argument that overall we actually are running a trade deficit that’s a bit higher than we should. But the solution to that, the cause of that is our domestic macroeconomic imbalances, especially our budget deficit. And the solution is getting that budget deficit down. The last thing I’ll say here is the thing that every economist basically agrees on is that almost every bilateral trade deficit is totally irrelevant. If I go to 20 different stores, and some of them I sell things to and some of them I buy things from because I’m like a traveling merchant, I don’t care about my balance with any given store, I might care about my balance overall, but not with any given store. So the example a lot of people have used recently is Lesotho. The United States runs a trade deficit with Lesotho. Why? They buy nothing from the United States because they’re really poor and they’re really small. We buy a lot from them because they have diamonds. So you want to reduce your trade deficit with Lesotho. The only way to do it is to not have as many diamonds in this country. And while that wouldn’t bother me, I don’t think that should be an objective of national policy.

Jason Bordoff: So that was very comprehensive and well explained as you always do. And I just want to come back to the argument made by this administration, by some right-leaning economists. You were just talking with Oren Cass about this in the New York Times the other day, that we lost manufacturing in this country and we need to bring it back and we should be willing to pay slightly higher prices for reasons of the health of our economy, inequality, the middle class economic security and resilience and supply chains, which people are thinking even more about after the pandemic. Is that a rationale that makes any sense to put tariffs in place?

Jason Furman: No, not at all. So first of all, the main cause of manufacturing job loss is technological improvement. Manufacturing job loss has been going on for 50 years. Back in the early 1980s, Billy Joel was singing, we’re living here in Allentown where they’re closing all the factories down. So that was way before NAFTA. That was way before China joined the WTO. So largely it’s technological. The causes and manufacturing jobs are going down in China, manufacturing jobs are going down in Germany, manufacturing jobs are going down almost everywhere except poor countries that are just beginning to industrialize. But here’s the way that I think is the better way to think about it. Right now, 96% of the people in the United States who want to work are working. We have 4% unemployment rates and 96% who want to work are working. That’s about as good as it’s going to get. Because you get any better than that, the Fed’s going to raise interest rates because they’re going to worry about inflation. And by the way, if it gets any lower than that, the Fed’s going to cut interest rates to get us back to there.

So you want to think that basically that’s what’s going to be happening in your labor market. Then the two questions you want to ask yourself, one, what can people buy with their wages? And the more imports you have, the more variety, the more options, the lower prices. And that’s the equivalent of making every job in America better. If you make things 1% cheaper, you just gave everyone a 1% raise in the whole country. All the jobs got better. So that’s one thing you want to think about. What can you buy with your wages? And then the second thing is you want to think of those people who are working, what are they going to be doing?

And in general, giving people the choice of being in an export job, making something for some other country or making something for Americans [it] is generally going to be better than they have to make something for Americans. By adding the export thing, you’re adding an option. You’re basically only going to do that option. If you’re more productive in it, you have a higher wage in it. And so we’re also going to have better jobs if you have a larger export sector. We just don’t want to be making t-shirts and shoes here in the United States, and if we had to do that, we’d figure out a way to have robots do it. We’re not going to be paying people to do those things.

Jason Bordoff: So that all makes clear and good sense. If you’re thinking about overall economic growth and incomes and job creation, it seems like the conversation now across the board, both sides of the aisle more and more is about how economic security, national security, supply chain resilience should overlap with everything you just said that in case there’s a conflict in the South China Sea, we want a strong transportation manufacturing sector here because auto companies might need to help gear up for that or semiconductors and other kind of advanced technologies. And is there an argument that we need to have this domestic manufacturing and home? What are those concepts of economic security and national security mean to you from an economic policy standpoint?

Jason Furman: Yeah, so I absolutely agree that that’s an incredibly important consideration. It is a very good reason in some cases to deviate from what I would recommend with a purely economic lens. And it’s something we have to think about in an awful lot of trade. Now, notably, that isn’t about the trade deficit. If every single car in the United States came from China and we were afraid they were going to shut off the car supply, even if we had an overall trade surplus with China because we were selling them stuff, we’d still worry about the vulnerability in cars. So this is less about the trade deficit and more about trade and certain types of things and the ability to make certain types of things. Those national security considerations from my perspective, all involve cost benefit analysis. The cost is that if we try to make those things in the United States rather than import them, we’re probably not going to be as good at it.

That’s why we were importing it before because we weren’t as good at making it. And so it’s going to be more expensive for our consumers or the jobs in it aren’t going to actually be as good as the jobs people otherwise would’ve had. So I don’t think free markets get every single thing right, always. But I think they’re a lot better than central planning at getting things right for wages, for productivity for GDP. There’s no reason to think, though, that a free market is going to get national security or that any business is going to take that into account or sufficiently take that into account in a way that the government has to. So if you go out and say, you know what? We are going to have slightly worse microchips and we’re not going to create a lot of jobs in the microchip sector, that wouldn’t have gone to those people anyway.

By the way, everyone who works in a microchip factory has an advanced degree. Not everyone, but a lot of them have advanced degrees. They would’ve had jobs anyway. So this is not a jobs program, this is not an economic development program, but this is a cost that is worth paying to make our country safer. And you do the cost benefit analysis, then I’m open to it. So for microchips and there we mostly do it with subsidies, not protection. I think that is almost definitely a good idea. Cars for me are trickier. There’s an argument that you want the auto factories, so in the event of a war you can retool them and build tanks or planes and some of that happened in World War II. I am trying to wrap my head around that. I’ve talked to a lot of people. I get the sense that those factories are specialized enough that it doesn’t give you that much of a leg up in your industrial capacity.

Moreover, it’s hard to imagine a scenario in the near future where we’re getting a meaningful fraction of our cars from China. Our cars are from the United States and from our allies. So I don’t think maintaining industrial capacity in the auto sector makes sense, but I’m very open to being wrong about that or that changing drones would be one where if your goal is to get the cheapest possible drones, buy ’em from China. If your goal is to have resilience in national security, I’d love to have more drones made here in the United States for national security reasons. It’s much clearer their role in war than the role of driving cars around in a war. So there’s no sort of substitute for forgoing item by item and having a more targeted strategy. And sorry, lemme just say one last thing in this very long answer, which is once you’re thinking about national security, trade is not your only tool. The Biden administration understood this quite well. They did grants to the microchip sector, for example, the Trump administration seems to only be using one tool, which is tariffs. In fact, if anything they’re deriding. The other tools, the subsidy tools, although they haven’t done a lot to actually cut them back in the microchip space fortunately, but they certainly seem rather unenthusiastic about them. And at any point you could imagine them being cut.

Jason Bordoff: This is an energy podcast, so I want to get to some of what the implications might be for energy and the clean energy transition. So we depend on China for lots of the technologies and products that are needed for the clean energy transition, of course EVs and batteries and refining and processing critical minerals and solar panels. And I’m wondering, just listening to you a moment ago, I was thinking of the headline, the title from an article by Dan Dresner in Foreign Affairs last year, How Everything Became National Security and National Security Became Everything. And it’s a little of the… I was asking Jake Sullivan on stage at our conference last week, how small is this so-called small yard with a high fence? Is that a concern you have that actually there’s a lot of things [where] the yard is not so small because we’re kind of expanding the concepts of resilience and national security to a bunch of things. To which in your view, it doesn’t apply.

Jason Furman: Yeah, so just because somebody says national security doesn’t make it true Nippon Steel’s acquisition of US Steel, I don’t think there’s any serious national security expert that thought it was dangerous for the United States to let Japan make some really big important investments in a company that was going to continue to produce in the United States. In fact, if anything you could argue there might even be some national security harm that was done when you block your ally from doing it. So sometimes people invoke national security as a pretext for something that isn’t really about national security. But when it comes to energy…solar, I’m confused with oil. We use about 20 million barrels per day and if you cut off our oil we have, you would know 90-day supply? Maybe more than that these days? with all the private investment…

Jason Bordoff: And we’re a net export and we net export,

Jason Furman: You’re right, good. So oil,

Jason Bordoff: …you still have to figure out how to consume your domestic oil, but…

Jason Furman: We were vulnerable once upon a time, if the oil was cut off within weeks, you would start to have problems. Solar panels, you get the solar panel and then for the next number of years all you need is sun, not a new solar panel. So to me it feels a little bit less vulnerable to being shut off. Now maybe people build some backdoor into it and they can press turn off on the whole thing, but the people who can do that may be able to do that with our electrical grid as well. There may be an awful lot that if what you’re worried about is a cyber attack, it might be that you need to invest in cyber defense more across the board rather than saying we’re not going to use Chinese products. So I have tended to lean on the side of thinking that solar panels aren’t really like oil. There are a capital expenditure and we could handle being cut off from them in a way that we couldn’t handle at least once upon a time. Couldn’t handle being cut off from oil. And so I’d rather get the much cheaper, better ones than try to build our own industry. So that’s the end that I’m on, but that’s not a hill I would die on. And I’m very open to evidence and torn about the question.

Jason Bordoff: And I guess there’s stuff in the middle. If I were to ask you about batteries or refining and processing of critical minerals, I suspect this is a spectrum.

Jason Furman: Yeah, it’s a spectrum. On one end of it is microchips and drones and on another end of it is toys and solar panels and critical minerals and batteries and all that is somewhere in between.

Jason Bordoff: And well, let’s pretend people are on the side of the spectrum where they’re much more concerned about the national security implications of all of this. And then you want to maybe how you want to respond to that, you want to put a lot more manufacturing here at home, is that the right response? And then how feasible is that? I think some people will talk about that. Let’s just put this manufacturing on shore because it’s safer and it protects disruptions in supply chains. But while China has not always played by the rules that maybe some assumed in the 1990s today, their cost advantages come from real advantages, economies of scale, innovation, just the supply chain efficiencies there are dramatic. It seems to me like it would take a very long time to try to replicate any of that production capacity in the US even if one were committed to doing it. Does that sound right to you?

Jason Furman: Yeah. So first of all, lemme say by the way, an unfashionable thing, which is I don’t really even care whether China’s advantage comes from subsidies or because they’re better at making it. Either way it’s cheaper for us. And if they’re subsidizing, I think it’s more us taking advantage of them than vice versa. Put it conversely, if you asked me if I wanted to support a law that would give a tax credit to Chinese purchasers of American EVs, I’d say no way. I don’t want to spend my money on Chinese people buying our electric cars. So this is an unfashionable view that I just expressed, but I want to get it out there.

Jason Bordoff: Well, it comes to this question of the Biden administration often pointed to over capacity. And I always found that word interesting in China, they make more, we could pick the product than the world needs, and that’s pushing prices down for the rest of the world. Now if you’re thinking about clean energy, I think Brian Deese, our friend and former colleague, had a piece in the Washington Post noting China’s manufacturing capacity for green hydrogen exceeded world demand by something like four times. If you want to be on track for your climate goals, we need to increase production like a hundred times. So it was always hard for me to quite grasp why we should be troubled that China was making more than the world needed and pushing prices down unless you were worried that we weren’t going to be building that here at home. And it was unfair to us companies that wanted to manufacture or produce and US workers that might lose jobs as a response. Is that the flip side of what you just said?

Jason Furman: Yeah, that very much is and over capacity. There are some fancier definitions of it and there were people in the administration that I think did as thoughtful a job as you could do with the concept. But there’s also a crude version, which is that if you’re an export or something, you have over capacity in it. And you want a world where every country in the world is exporting some stuff and importing some stuff. So every country in the world has excess capacity in certain areas. Some of the arguments were like that one around hydrogen, which is like, oh, isn’t it a mistake for China to be doing this? They’re making so much and there’s not enough people to buy it. In that case, sort of give your friendly advice to China. By the way, we don’t mind it all for our sake, no harm, no foul by the way you’re helping us out.

But for your own sake, maybe you want to change it, but in the meantime we’ll enjoy the cheaper prices and the extra stuff from you. So some of it’s a little strange when it’s us telling them that they’re making a mistake. And by the way, some of these sectors I’ll bet they are making a mistake, subsidies that aren’t in their interest and extra production, that’s not in their interest. And ultimately there are the main ones that will pay the cost of those mistakes. Going back to what it would be like to build all of this stuff in the United States, people have spent the last week trying to figure out what it would cost to build an iPhone in the United States. And the estimates range from several hundred thousand dollars a phone to like infinity a phone. Now I think we could get better at it and bring those costs down and import some parts of it and et cetera. Some of those are static estimates. But again, you want to think that the same number of people are working and what are they doing? Are they doing something that right now is being done in China usually with lower paid workers or are they doing something that right now is done in America with higher paid workers? And from a purely economic perspective, I’d rather do the things that we do rather than try to replicate the things that China does. And it would be just a huge transition to try to replace all of that.

Jason Bordoff: And I dunno if you look carefully at the numbers for clean energy supply chains, but for people listening who may wonder what 145% tariff on China would mean for the pace of deployment of clean energy in the US, how should they think about that?

Jason Furman: I mean it’ll certainly slow it. It’s not like I have an estimate for you and there are people that do that for a living. You might know the answer already, Jason, but polite of you to see if I did.

Jason Bordoff: I guess what I’m saying is I’ll share this perspective. I think in the conversations about this in Washington, the combination of tariffs which both Trump and Biden had, obviously it’s been taken to a dramatically different level – subsidies through the Inflation Reduction Act for manufacturing, et cetera. And there was a sense that I asked Jake about this a few days ago, and the answer was that slows things down in the near term. But in the long term these are stronger, more resilient supply chains, you might, that sort of thing. And I hear that, but I guess what I’m saying is I think it’s a large, not a small headwind to the pace of the energy transition. I don’t think there’s a full appreciation of the scale, the magnitude, and really how extraordinarily difficult it is to try to accelerate, nevertheless, keep steady the pace of clean energy deployment if you really diminish China’s role in these global supply chains. Yeah.

Jason Furman: And look, let’s say I was convinced, and as I said, it might be the case that you want to have all the solar stuff or the batteries built here in the United States. I would much, much rather subsidize them here in the United States rather than put tariffs on them. Because once you put tariffs, especially 145% tariffs, then you are making it really expensive. In the short term, you’re guaranteeing yourself a very painful slow transition and you’re not even sure where you’ll get to on the other end of it. So I’d rather do more. That’s building us up rather than trying to tear China down.

Jason Bordoff: And these macroeconomic headwinds from the tariffs have also pushed commodity prices down, including oil. How important is that for the US economy and is that a big offset to the negative impact?

Jason Furman: I would think of that as a little bit more transitory to use a word that we shouldn’t use. And by the way, transitory could be two or three years or could be 50 years, I dunno how long, but so I can’t be disproven in this forecast. But some of what’s going on in oil right now to me feels at least quite cyclical related to fears about global demand and a global recession. But that’s certainly not going to help the president achieve his goal or I dunno if it’s his goal or the secretary of the treasury’s goal of an extra 3 million barrels per day. But it will offset for the world some of the pain of the slowdown. It matters by the way, more for China. This is more of a gift for China. The United States oil prices don’t matter that much to GDP because we both produce and consume, but it’ll help insulate the shock for China.

Jason Bordoff: Reference I made to sort of how the Biden administration went about this energy transition with an embrace of industrial policy. And that came with enormous demand side stimulus. You wrote a piece in Foreign Affairs not long ago, somewhat critical of that approach for what you saw as a retreat from support for free markets and trade liberalization and that huge demand side stimulus that in your view led to many of the inflation problems that featured prominently in the election. You could tell me if I’ve characterized it right or if I got it wrong, but I was wondering how you would respond to some of the responses to that article pointing out that supply shocks and global forces were much more significant drivers of inflation globally.

Jason Furman: There’s two pieces here of the argument one, and I’ll just take one of them and if you want to talk about other aspects, one is related to the specific policies in energy, in infrastructure, et cetera. But the one I will answer is the macro question, which is what role did US fiscal policy play in inflation? The simple version of it is if you do stimulus at the scale we did, and it was $900 billion in December, 2020. It was another $1.9 trillion in March of 2021. And then there were several more rounds on infrastructure, on chips, on student loan relief, which was done administratively without Congress. And even the so-called Inflation Reduction Act was upfront deficit increases and it only reduced the deficit later on. So there was stimulus after stimulus after stimulus. If you try to quantify this just using your standard types of multipliers, it would’ve said that output would grow maybe 6 or 8% above the pre-Covid baseline. And that’s just not something economies can do. There’s not enough supply to immediately go 6% above what you would do at full employment. What an economist would predict is if people have enough money to buy 6, 7, 8% more, but you can’t produce that much more than prices will go up by that magnitude. And that’s roughly what we saw. So it largely fits the projection. Now the response that people have is, but there was inflation in all these other countries and Joe Biden wasn’t president of these countries. So doesn’t that let him off.

Jason Bordoff: And that the central cause of the inflation spike may have been the pandemic. Yeah.

Jason Furman: Exactly.

Jason Bordoff: So.

Jason Furman: That’s the argument people make. I think the cross-country evidence is really uncompelling on that for four reasons. First of all, lots of countries made policy mistakes. So no one, I’ve never actually ever heard someone say the Great Depression wasn’t partly Hoover’s fault because there were also depressions in other countries if you make the same mistake as others and other countries spent quite a lot, would be point one. Point two: It was only in the United States where you saw an enormous increase in good spending. Now some people say, oh, we were at home, we needed to buy an exercise bike, not our gym membership. But the biggest spike in good spending actually happened in 2021 as the economy was reopening and service spending was rising. Moreover, you didn’t see that good spike in any other country or at least in any other major advanced economy. And so by increasing good spending in the United States, we drove up good spending around the world.

Third: Central banks, the Fed raised interest rates more and kept them higher for longer than you saw in other countries. In fact, if you look at the cumulative interest rate increase in the United States, it was more than a percentage point higher than what Europe did. And that itself means that we needed to do more to contain the inflation. And then finally, absolutely there was a supply shock, the Putin invasion, what it did to energy markets, what it did to food markets. I have no doubt that that added to inflation. It also added though much, much, much more to inflation almost everywhere in the world except the United States. And that’s because the price of natural gas here only went up a little and it went up astronomically in Europe and Japan.

Jason Bordoff: And do you have any sympathy for our friends who were sort of acting in a moment of extreme uncertainty and may have been thinking it’s better to risk overheating than what some perceive as an under not strong enough response in 2009 and then by 2023 or 2024 inflation unemployment were down quite a bit. So maybe it wasn’t as bad as suggested.

Jason Furman: I have some sympathy. Covid was raging like crazy in the beginning of 2021, but you could also see that the economy was only 3% or so. I don’t remember the exact number, it’s in my Foreign Affairs article, but something like that below where it was prior to Covid. The gap was closing rapidly. There was a trillion and a half dollars of excess saving money that people had gotten in the previous stimuluses and hadn’t yet spent. Households were in better financial shape than they were ever in. And so it was pretty knowable that this was too large. And in fact, there weren’t a lot of economists who were suggesting these numbers. There was not a detailed economic analysis that said spend $1.9 trillion. It was very much a political analysis, a lot of it outsourced to Capitol Hill. My sympathy though, ends in… that’s partial sympathy. It didn’t sound like a lot, but there, there’s more there than my tone might suggest, but my sympathy ends after that.

So when there was another $500 billion spent in August, 2022 for student loan debt relief that by then inflation was raging by then interest rates were high by then we had a huge deficit. That’s a big, big problem. Now, did this all work out in the end? In one sense it didn’t, which is that people hated the inflation. And that undoubtedly played a role in the election, plus played a role in undermining other goals. The president had it undermined his infrastructure plans, it undermined his plans to do more for children. It undermined a ton of things. Also, when the administration ended, inflation was still running at 2.8%. That’s not a horrible inflation, but that is enough to keep the Fed from being preemptive about continuing to cut rates and puts you in more vulnerability to a recession because you have less that you can do.

And finally, we came out of, all of this was just much more debt and deficit than we went into it with. And that itself has an ongoing cost. Contributes to things like the higher mortgage rates that we have today compared to when we went into this. So yeah, it didn’t work out terribly low unemployment inflation, but high mortgage rates, high debt, less abilities for the Fed to respond. Those are real downsides. Let me, though, finally say the US economy is – sorry, was up until somebody decided to do some rather large tariffs that we talked about earlier in this discussion – the US economy was the envy of the advanced world. They had less to do with the demand that they unleashed and more to do with the supply coming from productivity, especially the tech sector, from energy, from immigration, from all of that. So we really have enormous structural supply side strengths in the United States and figuring out how to foster the supply side should be the priority for policymakers going forward. Not thinking that demand is a panacea.

Jason Bordoff: And just on the topic we think about here every day, and many of our listeners do the urgency of moving faster on the clean energy transition, do you have any sympathy for the idea that, as you said in the article, yes, a more efficient approach maybe to put a price on carbon, but that was politically impossible. So throw a lot of money at the problem instead.

Jason Furman: Absolutely. And I said that in the article, I fully support the IRA. I don’t think they could have gotten something better than the IRA. The two things I want people to know though are, number one, if the subsidy is to use wind or use solar, it’s pretty high bang for the buck in terms of carbon emissions. If it’s a subsidy for building a factory that makes solar panel in the United States, the bang for the buck in terms of carbon emissions is basically zero. And so money spent on the industrial transformation.

Jason Bordoff: Just explain for people listening why that is.

Jason Furman: Because if you could buy a solar panel from China or you could buy a solar panel from the United States, but to buy it from the United States, you need a subsidy. Either way, you get one solar panel. Either way you have the same carbon emissions, but in one case, you’re spending money. So if you spend money that says that subsidizes an electrical utility to produce electricity using solar, you are going to get lower carbon emissions if you subsidize them to use one type of electric panel instead of another. That’s not the way it works. But just hypothetically, if you did that, you wouldn’t get any better carbon emissions, but you’d still be spending money. So the two things I’d want people to know, one is some of the money, the industrial transformation part didn’t actually reduce carbon emissions. But second is that this was considered to be this sort of amazing new way to solve the problem.

And it resulted in the same emissions reductions you’d get from a $10 to $15 a ton carbon tax. Now we couldn’t have gotten a $10 to $15 a ton carbon tax, so we should have done this, but we shouldn’t kid ourselves into thinking this was incredibly ambitious. It’s too late to do a carbon tax. A carbon tax will hurt disadvantaged communities. A carbon tax won’t result in technological change. All these different arguments, and I don’t like it. And I saw too many people, maybe I’m being unfair, too many people that rationalize something that they couldn’t do as saying, oh, we actually shouldn’t have done it.

Jason Bordoff: Meaning not acknowledging it was in fact a second or 10th best solution. It was actually optimal.

Jason Furman: That’s, I think some people got that, some people really didn’t and made argument over and over and over again. And why do I care? Because you never know what you can do in the policy world. So I would like to have anyone who’s doing policy in the back of their head have the idea of what the first, second, third, and fourth best would be. They get into the room if they can do the third best, and they really couldn’t have done the first or second. I’m thrilled with their job. If they somehow made the mistake of only knowing the third and fourth best and they didn’t even consider if there was a way to get the first or second, I’m more worried. And so this is more of a learning educational experience for the future. Plus my concern that it’s hard to build on the IRA approach. We can’t just take the subsidies and make them 10 times as large to get the next round of substantial decarbonization. So we have to, I think, figure out some way, how to get a price on carbon.

Jason Bordoff: Well, when I was lucky enough to work with you in government, that is one thing I remembered about that experience, which is if anything started with a political discussion, how some particular interest group would feel about something or whatever your response would be, wait, put that on hold. First I want to know what the right answer is analytically, and then let’s figure out how close we can get to it politically, which I think is what you just said. So anyway, I hope people listening to this found it useful and interesting. I started this podcast eight or nine years ago just because it was an excuse to talk to the most interesting people I know and learn from them. And this hour has been a fantastic example of that. I’m sorry I can’t take EC 10 or I think that’s the name of the famous Harvard course you teach. So thank you Jason Furman, in a very busy time when you’re explaining this to lots of people in the world for taking time with all of us today.

Jason Furman: Oh, this was great fun for me, Jason, and look forward to coming back sometime.

Jason Bordoff: Great. Bourbon is on me.

Thank you again, Jason Furman. And thanks to all of you for listening to this week’s episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University School of International and Public Affairs. The show is hosted by me, Jason Bordoff and by Bill Loveless. The show is produced by Mary Catherine O’Connor from Latitude Studios. Additional support from Caroline Pittman, Trevor Sutton, and Kyu Lee. Sean Marquand engineered the show. For more information about the podcast or the Center on Global Energy policy, please visit us online@energypolicy.columbia.edu or follow us on social media @ColumbiaUEnergy. And please, if you feel inclined, give us a rating on Apple Podcasts, it really helps us out. Thanks again for listening. We’ll see you next week.

It’s hard to overstate how consequential President Trump’s “Liberation Day” tariffs have been for American economic policy. While the administration has paused the steep reciprocal tariffs it announced on trading partners other than China, a flat across-the-board 10% tariff remains. And China has raised tariffs on all U.S. goods to over 100% in retaliation.

Some economists fear this trade war could have a seismic impact across the American economy, including on clean energy. The exceptionally high tariffs on China in particular could have a significant bearing on clean tech products — things like batteries, solar panels, and wind turbines.

So what are the possible outcomes? Do our trade deficits or national security imperatives necessitate this trade war? What would a turn away from globalization mean for efforts to confront climate change? And what does all of this mean for the future of industrial policy in the U.S.?

This week, Jason Bordoff talks with Jason Furman about the flurry of Trump administration tariffs and how they could play out for the energy industry.

Jason Furman is Aetna professor of the practice of economic policy at Harvard University. Prior to his appointment at Harvard, he served as a key economic advisor to President Obama, including as the chair of the Council of Economic Advisors. Jason played a key role in implementing the major economic policy initiatives of the Obama administration, including the American Recovery and Reinvestment Act and the Affordable Care Act.

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