After months of wrangling, the U.S. and the EU have reached a trade agreement. The EU made big compromises, like a 15% tariff on most EU exports. How will the deal affect Americans?
Guest
Matthias Matthijs, senior fellow for Europe at the Council on Foreign Relations. Dean Acheson Associate Professor of International Political Economy at the Johns Hopkins School of Advanced International Studies.
Peter Chase, senior fellow at the German Marshall Fund. Served as vice president for Europe at the U.S. Chamber of Commerce from 2010 to 2016.
Transcript
Part I
DONALD TRUMP: Thank you very much. So we have good news. We’ve reached a deal. It’s a good deal for everybody, I believe. And it’s, I think you were saying this is probably the biggest deal ever reached in any capacity, trade or beyond trade.
URSULA VON DER LEYEN: It is.
TRUMP: It’s a giant deal with lots of countries.
MEGHNA CHAKRABARTI: After months of wrangling, the United States and the European Union have a trade and tariff agreement. President Donald Trump there made the announcement last week in Turnberry, Scotland sitting next to European Commission President Ursula von der Leyen.
URSULA VON DER LEYEN: We have a trade deal between the two largest economies in the world.
And it’s a big deal. It’s a huge deal. It will bring stability; it will bring predictability. That’s very important for our businesses on both sides of the Atlantic.
CHAKRABARTI: But the EUs 27-member nations made some big compromises in this big agreement, such as a 15% tariff on nearly all EU exports to the United States.
France Prime Minister François Bayrou called it a quote “dark day for Europe.” German chancellor Friedrich Merz said the deal could cause significant damage to his country’s economy. And according to reporting by Politico EU, French President Emmanuel Macron told France’s council of ministers that quote, “In order to be free, you have to be feared. We weren’t feared enough.” End quote.
European Commission, president von der Leyen at a press conference, acknowledged some of the EU members’ disappointment.
VON DER LEYEN: 15% is not to be underestimated, but it is the best we could get. We should not forget where we would’ve been on the 1st of August. We would’ve been at 30%.
CHAKRABARTI: President Trump had previously threatened to start a 30% tariff on the EU beginning August 1st, as the European commissioner there referenced. Well as part of the new trade deal, the EU also pledged to buy billions of dollars in American goods, some $750 billion worth of oil, natural gas and nuclear energy, and $40 billion in AI chip technology.
In addition, EU companies agreed to invest at least $600 billion in quote “various sectors in the United States by 2029.” President Trump bragged about that last one on CNBC earlier this week.
TRUMP: $600 billion to invest in anything I want. Anything. I can do anything I want with this. And the purpose was they’ve been ripping us for so many years that it’s time that they pay up and they have to pay up.
U.S. Commerce Secretary Howard Lutnick also touted the agreement on Fox News.
LUTNICK: The European Union is going to pay 15% and they sell us $600 billion worth of goods. That’s $90 billion for America. And they agreed for the first time ever to cut all their tariffs, cut their barriers, and let American businesses and farmers and ranchers and fishermen finally sell into the European Union.
Massive market. This is huge for America.
CHAKRABARTI: Today we’re going to examine the deal in detail. Did the European Union cave as much as President Trump says it did? And if so, why? How is Donald Trump reshaping global trade agreements and is it to the benefit of Americans or not? After all, even though Lutnick says the EU is going to quote, pay 15%, that’s not exactly how tariffs work.
Tariffs are essentially taxes on foreign goods once they enter the United States, they are paid by the importer, which is usually a U.S. company, and those costs are then passed on down the supply chain often all the way to you. So joining us now is Matthias Matthijs. He’s senior fellow for Europe at the Council on Foreign Relations.
He’s also Dean Acheson associate professor of International Political Economy at the Johns Hopkins School of Advanced International Studies. Professor Matthijs, Welcome to On Point.
MATTHIAS MATTHIJS: Delighted to be with you, Meghna.
CHAKRABARTI: So first and foremost, I was wondering, did you watch the announcement that was done in Scotland with Ursula von der Leyen and Donald Trump?
MATTHIJS: Absolutely. I was in Europe at the time.
CHAKRABARTI: Okay. Now, if you could try to read the body language versus what was actually said, how would you have interpreted the European representative’s body language?
MATTHIJS: Yeah. On the one hand, it was a deep sigh of relief, as I think you’ve heard previously from Ursula von der Leyen, right?
It could have been a lot worse. Understanding that 15% is way higher than let’s say 4%, 3% to 4% that prevailed in January 2025. On the other hand, 30%, even 50%, which President Trump had threatened in late May at some point would’ve been a lot worse.
So there was relief on the one hand, but on the other hand, I think understanding on the part of the European Commission that they, some of the cards they had in these negotiations, the best cards they had were taken away by many of the EU member states. Because they were so desperate to have a deal. And they also wanted to wait with any retaliation, which basically meant from very early on, starting in February, March, April, that the European Commission could never fully put its weight behind these negotiations.
Because there was another game going on with the White House where individual member states, even individual companies, like car producers from Germany and so on, were doing their own negotiations with the White House at the same time.
CHAKRABARTI: Ah, isn’t that interesting?
Okay, I’m going to come back to that Professor Matthijs, but I want to actually just do some historical background here. As you had mentioned earlier this year there was that 3% to 4% tariff issue, but historically and on average, I think it’s been tariffs on EU goods to the United States have been far less than that, maybe 1% to 2%.
So even with this 15% tariff, we’re looking at a best-case scenario, five times as much as it’s been, historically been. Worst case scenario, 15 times as much as it’s historically been. Now, as I mentioned earlier, tariffs are paid in the United States. And while it’s revenue for the U.S. federal government, that money is coming from somewhere, and often from U.S. consumers.
So just, to get, cover our basics here, why is it that the European Union wanted to keep those tariffs as low as possible? Because Howard Lutnick says the EU is going to pay that 15%. That’s not strictly true, but why is it that the EU wanted to lower tariffs as much as possible?
MATTHIJS: Yeah, there’s a look in your question. So first of all, the European Union has traditionally operated within a rules-based system that the U.S. put in place after World War II and in which it’s very comfortable, right? And the World Trading System, the way it’s been evolving since the late 1940s has always been a liberalizing force, gradually and slowly and sometimes frustratingly, but the idea always has been that tariffs are taxes, and they hurt consumers, right?
And they create distortions in the market. So the idea has always been that free trade would benefit the most people, even though, as we all now know, after so many years, that it creates winners and losers.
But the winners win more than the losers lose. And so with clever public policy redistribution could make that up, right? So when we started this year at these very low tariffs, coming out of the Biden administration, it was clear that once Donald Trump was elected, he was going to increase it.
He calls himself tariff man. He calls tariffs the most beautiful in the English language. So this was where things were going to head. Now here’s the thing with trade theory. A big country like the United States with market power that a lot of countries sell their goods into, has some power to set what they call an optimum tariff.
Meaning a tariff that’s not super high, low enough, let’s say 10% to 15%. That brings in revenue and that forces other producers in the rest of the world to lower their prices. Basically, what Trump himself calls, eat the tariffs, right? At the same time, there’s the possibility that the dollar becomes stronger because a lot of countries want to buy more dollars that they’ll need to sell into the U.S. market and buy into the U.S. market.
And so that then would take care to some extent. If a stronger dollar makes it easier for Americans to buy goods in Europe, that also would undo the tariff to some extent. Now the dollar has weakened since January, so that effect is not in play. And we also know that the profit margins of many companies who sell into the United States are not that high.
So they can temporarily take a loss, let’s say, like German car companies did to keep market share, but they cannot keep doing it. After a while, they will have to start looking for different markets, non-American markets, where they can profitably sell into, and where tariffs aren’t as high.
CHAKRABARTI: Interesting.
Okay. So to put it in more layman’s terms, the reason why tariffs, European nations want to keep tariffs low is to maintain demand here in the United States, right?
MATTHIJS: Absolutely.
CHAKRABARTI: Because otherwise costs go up here and demand drops and the United States being the largest economy in the world, it’s not necessary.
It’s not a market that you can turn your back on. Okay, so to that point then, it sounds like this, almost a fractious federal problem within the European Union is one of the reasons why the EU as a whole had to settle with this 15% tariff rate. What will that 15% though, right now, what impact are various companies in Europe or even nations saying is going to have on them going forward?
MATTHIJS: Yeah. So excellent question. In the short term, and so you’re absolutely right that for some European countries, the U.S. market is existential, right? If you think about Irish and Belgian sales of pharmaceutical products, for example, that are still exempt from this tariff, right?
There’s still going to be another 232 section tariff that’s going to come on pharmaceuticals, which we expect soon. But so, it’s definitely true that there was a lot of pressure on the European Commission to make a deal, to get some sort of certainty for producers, exporters, that it’s 15% and then they can adapt, and they can work with that.
Of course, we yet have to see if these tariffs are going to stay in place, for how long, if they’re gonna go up in the end. The Trump administration is very unpredictable in that sense. They always keep this as leverage. It was important for them to keep this tariff at a certain manageable level.
They would’ve preferred 10%, which is something they had settled on in June and July. Trump rejected that. 15% is higher, but it’s still doable. And so what will happen is that European companies in the short term, I think will probably want to maintain market share and in the longer term and eat some of the tariffs. In the longer term, they will look for different markets. Some of them may also be looking to invest into the United States, but these are longer term decisions that, you know, yet have to materialize.
Part II
CHAKRABARTI: Let’s listen to a little bit more of how members of the Trump administration, specifically the commerce secretary, Howard Lutnick, has described this trade agreement. He was on Fox News last week and he also highlighted that the deal includes commitments from European companies that they’ll build factories in the United States.
HOWARD LUTNICK: the president was saying, if we’re going to lower tariffs, how do I know your businesses are going to invest? And the European Union put together all of their companies, their pharmaceutical companies, their auto companies, all their businesses that they could then give to President Trump and said, we are committed to building in America $600 billion of additional investment. That’s on top of the $100 billion, $110 billion they invest a year, and this is just during President Trump’s term. So it’s huge investment coming in.
CHAKRABARTI: And as you heard earlier, that $600 billion of additional investment isn’t exactly specified just yet. Lutnick also added that Europe has a $235 billion annual trade surplus with the U.S.
LUTNICK: They sell us more stuff than we sell them. And you know what they do with those dollars? They just buy America. We’re basically having America sold out from under us by continuing to have these $1.2 trillion globally trade deficit, which every economist says should not be able to happen. So it’s got to end.
The president is changing it, so his view is, you can onshore to get rid of it, or you can pay a tariff to get rid of it, but let’s figure out how to get rid of it.
CHAKRABARTI: So that’s the Commerce Secretary Howard Lutnick on CNBC. Joining us now is Peter Chase. He’s a senior fellow at the German Marshall Fund and he served as Vice President for Europe at the U.S. Chamber of Commerce from 2010 to 2016.
He’s also been a U.S. diplomat for three decades and he joins us from Brussels in Belgium. Peter Chase, welcome to On Point.
PETER CHASE: Thank you very much. Delighted to be with you.
CHAKRABARTI: The Commerce Secretary says that Europe has just been buying America. Until President Trump came along in the second term. How has Europe been doing that?
CHASE: And it’s interesting because there was also the discussion about what they had promised about investment and that investment is supposed to be a good thing, but isn’t that investment also buying America? It’s curious the way Mr. Lutnick phrased that. To me, I think it’s important when you’re looking at the U.S.-EU economic relationship to start by focusing on the fact that this is in fact an investment-based relationship, not a relationship based on trade.
The European companies have already invested $3.5 trillion in the United States over the years; that’s a huge amount of investment. They have huge factories already that employ about 8 million American workers, and it’s rich to me that the administration is trying to say that this is something new.
Because in fact, it’s not new at all. It’s important to also say that American companies have invested $3.9 trillion in Europe, and these are huge amounts of investment between the United States and Europe. And with all of the trade going on between us, which is over a trillion dollars, over half of that is between factories of one company in the United States and in Europe.
So Ford U.S. and Ford Europe, trading back and forth. Everything that these tariffs do make, creates costs for those intra-company operations.
CHAKRABARTI: Peter Chase, just to clarify, when you say investment, is that what you mean in terms of manufacturing and not simply strictly consumer goods?
Are you talking about that intra-company trade? Is that what you’re specifically talking about?
CHASE: Correct. So if you look at all of the trade between the United States and Europe. A large part of that trade, so European exports to the United States, are actually components that will be used in factories in the United States to make things.
So very few people understand that the BMW, which is a German automotive company has a huge factory in South Carolina. That factory is one of the largest exporters. In fact, I believe it is the largest exporter of autos from the United States.
Those autos that are made in America are made using parts that come from American component suppliers, but also European component suppliers. So there is a already existing very large trade and investment relationship between the United States and Europe.
CHAKRABARTI: And so the thinking is that this 15% tariff can reduce that trade, or impact that trade and therefore have a negative impact on the workers in these places in the United States.
CHASE: Absolutely.
Absolutely.
CHAKRABARTI: Okay, so Matthias Matthijs, what do you think about that?
MATTHIJS: Yeah, I agree with everything Peter just said, one thing we didn’t discuss earlier is, of course, people tend to look at these straight deals, and it’s part of the success story, I think, of the Trump administration framing this narrative as winners and losers, but what the EU decided not to do is put tariffs on Europeans, right? And so in the end, this is an asymmetrical deal where there’s a 15% tariff that Americans need to pay on buying EU goods, including, as Peter said, many of the companies that get components and parts from Europe, while Europeans will not see that price effect when they buy American goods, right?
These will not become more expensive, will also not lead to higher inflation, and down the line will not put pressure on central banks to raise interest rates. So that, I think, is something that’s often forgotten. It’s not because the Trump administration turned full on protectionist and against free trade, that the European Commission has done the same thing, and I think that, in the end, was in the interest of the European consumer and European workers.
CHAKRABARTI: Okay. Interesting. So then, I’m just still thinking about this number, the $235 billion annual trade surplus that Howard Lutnick says Europe has with the United States, given the asymmetry that you just described.
Professor Matthijs, could that trade surplus be reduced, and therefore the Trump administration would call that a win as well.
MATTHIJS: What will likely happen is that trade volume will go down, right? So in general, the way trade theory and economic theory looks at this is that there’s a savings and investment imbalance, right?
So the fact that the U.S. has a big budget deficit. A federal budget deficit means that they need to get savings to finance this, and they usually get these savings from abroad. So the trade deficit and the savings deficit, if you want in the U.S., go hand in hand.
So what will happen is more likely than not, Americans will buy less French wine that’s now more expensive and buy more California wine. So the exports of Europe to the United States will go down. But at the same time, it’s perfectly plausible that the exports from the U.S. into Europe will fall as well.
So you’ll see a smaller trade volume, but the difference between imports and exports may well be the exact same as we saw two, three years ago or this year.
CHAKRABARTI: I see. Okay. So Peter Chase then, how does what Professor Matthijs just said, how does that flow back into your analysis on the potential impact on American workers?
CHASE: My focus on American workers is actually more about the operations of a factory. The operations of a factory in the United States where people are sitting around, hundreds of people might be involved in producing a car or whatever the case may be. If, because of all of the uncertainty that the Trump administration is creating on international trade, what happens if one supplier of one particular good that’s really needed by that particular factory, if for some reason they can’t supply.
If one component can’t be used in a factory, isn’t available for a factory, can that factory continue to produce? There’s that wonderful story about for want of a nail. There was not a shoe, what do you call it? A shoe on the horse, and that led to the end of a battle. Taiwan supplies a lot of screws to the United States and for American factories.
What happens if Taiwan screws are not available to those factories? Do you see what I mean there? There are many products that are supplied, particularly by Europe, which supplies higher end products and components that actually don’t have American producers as substitutes today.
CHAKRABARTI: Ah. Okay.
CHASE: That could make a problem for the flow of factory operations, which could actually affect the wellbeing of the American workers who work in those factories, whether they’re owned by Europeans or Japanese or Americans.
I wonder if we’re already seeing that to a certain degree. Especially from the automotive industry, right? When we’ve been hearing CEOs of Ford specifically has said that the cost of the tariffs is already going to be, what, some $3 billion to Ford.
CHASE: You are seeing it in American factories, and you’re seeing it as well in terms of China. And China was able to use its ability to supply rare Earth and other critical materials to the United States to effectively force the administration to back down on some of the things that wanted to do relative to the trade deficit that we have with China.
Can I say one quick word about the trade deficit issue that you talked earlier?
CHAKRABARTI: Yeah, sure, please.
CHASE: So Europe has a trade surplus with the United States. The commerce secretary said it was $235 billion, but the United States has a trade surplus with the European Union in terms of services.
So Mr. Trump and Mr. Lutnick are focused on the movement of goods between countries, but there’s also services. Banking services, intellectual property, audio visual things that the United States sells to Europe. And we have quite a large surplus when it comes to services traded with Europe. And the question that I think one could ask is, Should the Europeans somehow say that the trade surplus that we have on services trade is unfair?
CHAKRABARTI: Professor Matthijs, do you wanna take a shot at that?
MATTHIJS: No I completely agree. That in the discussion within Europe in the spring and the summer has always been to point this out, and there were voices all over Europe that said, if the EU wants to retaliate, it’s in services that it can do in general. The country that has the export surplus is at weak point in these negotiations. Because they rely on those markets more than their negotiating partner does.
Of course, the European Union decided not to go that route. And let’s not forget the EU-U.S. trade and investment relationship cannot be separated from NATO, from the security relationship between U.S. and Europe. And I think there was always a lot of pressure, especially from countries like Poland, like the Baltics in Eastern Europe, close to Ukraine, that there was this fear that if they were going to push the Trump administration too hard on trade, that they could be abandoned in Ukraine in their war against Russia.
And so that’s been the hardest in these negotiations, and that I think the Trump administration has exploited to full extent. Also, the belief was in Europe that after the NATO summit and the Hague and the pledge to spend significantly more on defense, including on American weapons.
From 2% to 3.5% to 5%, that this was gonna create significant amount of goodwill with the Trump administration on the trade front. And that also, I think in hindsight, has proven to be very naive on the European’s point of view.
CHAKRABARTI: Peter Chase, one quick thing just to nail down here. Because I’m going back to your analysis that investment is really the heart of the EU-U.S. trade relationship. So in terms of percentages, like what fraction of EU exports to the United States are, I guess these intermediate products as we’d call them and not finished goods?
CHASE: I believe it’s about half of the trade totally, between the United States and Europe.
That is European exports to the U.S. is our industrial components and inputs. There is a separate number, which is the intra corporate trade, which is the trade between companies, and that’s between American operations in the United States and their own operations in Europe.
CHAKRABARTI: Wow. Okay. But like 50%, that’s a huge number.
So with that in mind, we had talked about the automotive industry a minute ago, Ford just this week announced that it expects these U.S. tariffs to cost the company, as I mentioned earlier, $3 billion this year. And the second quarter results just in Q2 showed that Ford took an $800 million hit, profit hit from tariffs. And Ford’s CEO Jim Farley was on Bloomberg TV. The show called The Close. Just a few days after the U.S.-EU trade deal was announced. Host Matthew Miller asked him about the tariffs.
The Japanese or the Europeans, maybe the South Koreans, they’re getting away with a 15% flat tariff now, but you and other American automakers producing here have 50% tariffs on steel, 50% on aluminum. 25% on foreign parts, up to 80% stacked tariffs on Chinese parts. To the extent that it’s got to really disadvantage you when you’re competing against a Toyota built in Japan or a General Motors vehicle built in South Korea. Can you quantify that disadvantage?
Yeah, if you look at labor, if you look at the material costs, as you mentioned, Matt, and you look at the currency, a lot of these countries have currencies that really advantage their export. We think it’s $5,000 on say, a RAV4 versus a Kentucky built Escape. It may be as much as $10,000 on a Japanese built forerunner or a Subaru versus, a Bronco built here in Michigan.
So it’s really meaningful.
CHHAKRABARTI: CEO of Ford, Jim Farley, saying that there could be a $10,000 difference between a Japanese built SUV versus a Ford built in the United States because of these tariffs and also currency trading. Peter Chase, we have a minute before the next break here, respond to that.
CHASE: So it’s going to be more than a minute, but we’ll have the next break.
Look, you have to disentangle the cost of imports created by the Trump tariffs. So 50% tariff on steel and the issues related to currency, and I hope we can come back to that. Because the value of the dollar is driven by foreigners investing in the United States. And the Trump administration is trying to say we want to improve our trade balance, our current account balance, but that’s just the opposite of the flows of dollars into the United States, and that’s a very difficult conundrum, I think, for this administration.
Part III
CHAKRABARTI: Peter, you know what? Because you had asked about speaking about currency in more detail, let me just take advantage of it because I think I don’t want to pretend like I have a deeper understanding of currency markets, and I really do. So just explain it to me, like, why, how is it that currency values, or let’s say the strength of the dollar is driven by, as you were saying, investments in the United States or how the United States trades. Give us the 101 on that.
CHASE: I hate to say, Meghna, but international payments accounting is not a very sexy thing, but you can basically say, in terms of accounting, we all know that your equity is the difference between your assets and your debits and a firm. In the same way international trade and investment flows, you have a current account trade part, and that has to be balanced by capital flows.
So the administration is focused all on trade in goods. We talked earlier about how trade in goods is also only a part of all trade. There’s also trade in services, a country that runs a deficit like the United States in the current account, which is the trade in goods and services.
We’ll run a surplus in the capital account, because that money is coming in to offset that deficit in trade in goods and services. There was a time when I was working for the U.S. government in the 1990s when we were actually really quite concerned that there was so much European investment into the United States, that it was driving up the value of the dollar and that driving up the value of the dollar because Europeans are buying dollars in order to invest in the United States.
That was making it harder for us to trade. There are people in the Trump administration or associated with the Trump administration who feel that the value of the dollar is driven by all these foreigners wanting to invest in America. So there’s a lot of capital flow into the United States, and that drives the value of the dollar up, which affects the ability of our companies to sell their goods and services overseas.
And you heard Mr. Lutnick talk about how important it is that the Europeans are going to invest in the United States. The problem that he faces is that if they’re investing in the United States, that drives up the value of the dollar.
Do you see what I mean? And this is all, it’s really an accounting sort of thing rather than anything else.
But if you run a trade deficit, you are going to have a current account surplus, people will be buying your currency.
I would say that’s a good thing. If people are investing in the United States, it means that they believe that the United States has a good economy, that the rule of law applies there, that the stock market is big and liquid.
This is a good thing. The problem I think is for the administration. They somehow have said that a current account deficit or a trade deficit is a bad thing. And you could argue that’s not the case at all.
CHAKRABARTI: I see. Okay. And then just to reiterate one point that you’re making. A stronger dollar and Matthias, I’ll turn this back to you.
Because you had mentioned this before. A stronger dollar makes it harder for U.S. companies to sell their goods abroad. Just Matthias, did you want to add to that?
MATTHIJS: Yeah, I agree with everything Peter has said on the current account versus the capital account. The interesting thing about people like Lutnick and Trump himself, they seem to want a surplus on both the current account and the capital account. And that’s an accounting impossibility, right? So they want money to flow in the U.S. and they wanna sell to the rest of the world.
CHAKRABARTI: It’s creative accounting.
Matthias Exactly.
There is, but there is also a bit of a sort of a puzzle in the short term is that if you look at Europe-U.S., right, European interest rates are much lower than United States interest rates. And in the short term, the idea would be that the strength of the dollar would be driven, right, by the fact that, you get 4.5% return on just treasuries here, and you only get much less in Europe.
This should actually drive up the strength of the dollar because financial investors should want to hold more dollars. And that’s not what we’ve seen in the last few months. And so for people in the short term, this is hard to explain. And I think it is because this fundamental uncertainty that’s being cost about the U.S. economy that’s driving currencies.
Also, quickly, if I can, there seems to be, at least in financial markets right now, in the stock market and so on, there’s two different worlds, right? There’s the AI world. There seems to be no limit that the sky is the limit there, when it comes to investment. They don’t seem to be all that worried about how high interest rates are.
And then there’s the real economy. The one Peter and I have been talking about. And you have been talking about in the show, cars, pharmaceuticals, and so on that are very sensitive to interest rates, to tariffs, to all these sort of things, where I think the story is a lot less rosy and a lot less optimistic than we see in the world of artificial intelligence.
CHAKRABARTI: Oh, interesting. Okay. So many shows to do about AI. Peter Chase, there’s another thing that the Trump administration often says, and that is, hey U.S. companies, if it’s too expensive for you to import goods or tools or intermediate wares from around the world because of these tariffs, reshore that stuff. Bring your supply chain back home. Now I’m thinking, given what you said about 50% of trade between the United States and Europe being in these intermediate wares, would that be possible to reshore manufacturing or development of those goods?
CHASE: Meghna, everything’s possible.
Will it happen and how long will it be until it happens is a different question. I think as well, for when I hear American politicians, my politicians talk about manufacturing, what they really seem to be talking about is manufacturing workers. So they’re really interested in the voter and the people who work in factories, and that’s appropriate for them to be focused on that.
But what’s really interesting and what people don’t focus, don’t think about as much as they perhaps should, is that since the 1970s, the number of people employed in factories, manufacturing factories has structurally decreased from about 17 to 10 million. At the same time, U.S. manufacturing output, the value of manufacturing output increased.
And increased quite dramatically. If people manufacture in the United States, one, how many people will they actually employ? Will it be automated instead? And two, where will that employment be? Will it be in Pennsylvania or will it be in Kentucky or South Carolina or Arizona? Those are factors that people don’t bring into the discussion when they’re thinking about how important it is to have manufacturing in the United States.
Even though the value of the dollar is strong, because people invest in the United States, our exports, we run a huge trade surplus on services trade, and we’re able to do that because we have a really good services sector. Best movies, best artists, best law firms, best AI, all those things are things that we export as services.
And what the Trump administration seems intent on doing is actually increasing manufacturing but not necessarily manufacturing employment. And decreasing the services thing, which is over 80% of the U.S. economy.
So this focus on manufacturing trade has no relevance to the number of people, the size of the U.S. economy, the composition of the U.S. economy and where people are employed.
CHAKRABARTI: Yeah.
So there’s something that you just said, Peter and Matthias, that you said much earlier that I wanna actually bring together. Matthias, earlier you said that the idea with global free trade is that it would allow economies to grow maximally. And then the benefits of that growth through creative policy, you said.
Would be, would feed back into the people of those nations. And I would argue that’s happened in Europe much more than it’s happened in the United States. Because as Peter just said, we’ve had manufacturing, number of manufacturing jobs in the United States go down over the several decades while productivity has continued to rise.
The difference is like the capital surplus that’s produced by that has gone to the wealthiest Americans in this country, versus back to those very workers, which maybe not, is not what has happened in Europe.
I’m only bringing these two things together because this is exactly what propelled Donald Trump into the White House, and so therefore you can make the argument that the actions that he’s taking right now are indeed, in a sense, maybe if not intellectually, emotionally, what his voters want.
They want some kind of rebalancing of wealth and power, whether it’s for themselves, individually, or for the United States as a whole globally. And that’s one of the things I think that’s driving this overall political change in trade when it comes to the U.S. stance. And Matthias Matthijs, just your thoughts on that?
MATTHIJS: No, this of course predates Donald Trump to some extent, right? We saw the kind of unraveling of the global trading system, at least the belief in rules, the belief even by the United States and the World Trade Organization already under the Obama administration, right? Where they refuse to reappoint American judges to the appellate body, and it was just also the rise of China meant that there was a security element to trade that I think in the ’90s and 2000s was somewhat naively ignored.
I think the main point is that what the United States never took seriously in the ’90s and 2000s was trade adjustment assistance. They had a program, but it’s about a fifth per capita the size of, let’s say, what Denmark or the Scandinavians had, and also, as I think JD Vance pointed out in Munich among many other things he pointed out, but that was, for them, Germany was the envy of the United States because they managed to keep and hang on to their manufacturing sector in a much bigger way than the United States had.
So you’re absolutely right. In the end, Donald Trump ran on tariffs. He ran on trade protectionism. He was duly elected, and any good democrat with a small d would have to say, okay, that’s what we’re going to get.
And I think the rest of the world understands this. But here’s the main point, is that free trade has lost its luster. In, mostly in rich countries. Not in poorer countries, not in the global South. They very much believe in free trade, because they have the comparative advantage. They believe they can grow out of poverty and into, you know, welfare and higher wellbeing, at the way the Chinese have done, right?
The way in the ’90s and the 2000s, by taking advantage of the world trading system. So I think there’s also a kind of North-South gap here is that protectionism is a game that big markets like the U.S., even the EU and China can play, but many other countries, smaller countries that are not part of a big bloc, they cannot play this game of tariffs and subsidies and all that stuff. And so they’re gonna lose from this way more than I think we will in the U.S. or in Europe.
CHAKRABARTI: Just two more clips here from people who’ve been involved in these deals.
Once again, here is Howard Lutnick, U.S. Secretary of Commerce. He was on Fox News and he’s looking forward. He’s saying after big deals like the one between the U.S. and the EU, he says President Trump can basically set whatever tariff rates he wants for other countries.
LUTNICK: The president is in the driver’s seat now, right?
He’s done these big deals. He’s got really all the cards in front of him. He’s going to decide what the tariff rate is, how much these countries going to open their markets, and what the tariff rate is. The president has proven his tariff policies are exactly correct and they work.
CHAKRABARTI: So that’s the Commerce Secretary Howard Lutnick again.
European Trade Commissioner Maroš Šefčovič told reporters last week that indeed the terms of global trade have changed since April 2nd. Now, by the way, April 2nd was the day that Donald Trump’s tariffs first went into effect. He called it Liberation Day, quote, here in the United States. And that was the day where he slapped tariffs on nearly every country in the United States in the world, including a 20% tariff on the EU.
It’s quite obvious that the world which was there before the 2nd of April is gone and we simply need to adjust. We need to address the challenges which are coming from this new approach. And I believe that the strategic cooperation with our strategic partner is better outcome that allowed trade war.
CHAKRABARTI: Peter Chase. Again, we’ve just got about a minute and a half or so left here, but I’m thinking long term. First of all, both of you have very rightly pointed out that given the mercurial nature of President Trump’s decision making, who knows what’s going to happen with these tariffs even tomorrow, let alone in the coming months or years.
But Matthias had said something interesting earlier, about if tariffs are the new name of the game, ultimately, countries look for new markets. They look for new, more advantageous trading partners, which means not the United States. Is that a long-term concern that you have?
CHASE: I think the longer-term concern is the question of the rule of law.
And how it applies to international economic relations. The president of the United States has blown up the rule of law by simply saying, I can do what the hell I want. That is not how laws generally work. You could have easily said, there are things wrong with the commitments that we’ve undertaken. We need to change those.
There are legal processes to do, but he chose not to. I think the rest of the world needs to decide. Do they all want to play in a world where power rules or where rules rule? And I suspect that other countries will start saying we need to reinforce a rules-based system among ourselves and encourage the United States to try to come back and at the same time also look to China.
Because I think Matthias talked about some of the problems with China and it’s over capacity. China has an addiction to an export growth strategy that also creates distortions in the economy that need to be addressed. But I would say that Europe and Japan and the UK and Switzerland, who is being hit even harder than EU on these tariffs, and all of these other countries need to be working together to rebuild how their economic relationship is going to be covered.
And I think that there is a way to do it. I think the WTO and the IMF and all those things actually do apply, but they’re going to have to be applied without the United States ruining them. And ruining the way there, they apply, as Matthias referred to in terms of the WTO dispute settlement volume.
The first draft of this transcript was created by Descript, an AI transcription tool. An On Point producer then thoroughly reviewed, corrected, and reformatted the transcript before publication. The use of this AI tool creates the capacity to provide these transcripts.