Mark Copelovitch on Costs of Tariffs and Wars on the Economy

Zac Schultz:
Tariff threats and trade wars continue. Israel launches an attack against Iran and the Trump administration signals it may bring the U.S. into a war in the Middle East. There are a lot of developments around the world that are being felt back here in Wisconsin. And for more on this, we turn to Mark Copelovitch, professor of political science and public affairs at UW-Madison specializing in international relations and political economy. Thanks for joining us.

Mark Copelovitch:
Thanks for having me.

Zac Schultz:
So we’ve heard over and over that business loves certainty, but these seem to be very uncertain times.

Mark Copelovitch:
Yes, deeply uncertain times.

Zac Schultz:
And what does that mean for business, especially because we’re interconnected? Wisconsin is not as isolated as people — some people may think it is.

Mark Copelovitch:
Yes. Well, it’s not just business that hates uncertainty. It’s international relations professors who also hate uncertainty. So in general, really bad things happen in world politics when there’s a lot of uncertainty. And both on the security side and on the trade policy side, that’s what we’re seeing right now. So, you know, on the on the security side, obviously there’s what’s going on with Israel and Iran and, you know, lack of clarity about what role the U.S. is going to play in that. But in terms of tariffs and economic policy, the last five months under President Trump has been week after week of uncertainty because of the way, the way the tariff policy is going is an announcement of what’s going to happen and then a reversal and then a new announcement and a new reversal. And, you know, so the way we’ve — the way the U.S. and other countries of the world, for decades now, going back to World War II, have tried to deal with this, is by setting up the World Trade Organization and a bunch of international treaties where you lay out what country’s obligations are both moving towards free trade, but also a lot of tariffs and substitutes for tariffs are legal under these trade agreements but the trade agreements create certainty for business and for governments. And Trump is operating effectively as if none of that exists or the U.S. is not bound by it.

Zac Schultz:
So anyone who’s had to buy coffee lately, or thinking about a new vehicle knows that prices are rising. Is there any sense for whether a business or an individual to try and time the market or is it just buy now before prices keep going up?

Mark Copelovitch:
Yeah, I mean, so you could imagine — I think it’s the second one because you can imagine a world and this happened more or less under the Biden administration with we’re going to put new tariffs up on China. And, you know, we’re going to keep some of Trump’s tariffs. But more or less, there’s the announcement of those policies. And then you can plan going forward, right. And both consumers and businesses can kind of make medium and long-term purchasing and investment decisions based on that. What’s happening now is we’re going to have 10% tariffs on China. No, they’re going to be 145%. No, we’re going to suspend those. And in 90 days, we’re going to negotiate something different. And you know, there has been talk of we’re going to have 90 trade agreements and we don’t really have any yet. So it’s hard to time the market right now because nobody knows what’s going to happen two weeks from now, let alone six months from now, let alone a year from now. The one thing you can plan for is the baseline now is different, right? So Trump has invoked the International Emergency Economic Powers Act to put up a baseline 10% tariff on everybody in the world. Some higher tariffs on Mexico and Canada and China. So the one thing we all know is some things are now more expensive, right? But there’s a lot of uncertainty now about is that 15% or 150% going forward.

Zac Schultz:
We’ve heard a lot about trade with China being impacted by tariffs, especially in agriculture. Your specialty is the European Union. Can we find new markets there? Does anyone want Wisconsin’s soybeans?

Mark Copelovitch:
Yeah. It’s hard to shift things completely. I mean, a lot of things, you know, as I talk to my students and talk about the global economy, a lot of things are just structural, right? That countries specialize in producing different things and the U.S. and China and Europe are the three largest economies in the world. And a lot of the trade flow patterns and why we have a deficit in some things and a surplus in other things is just kind of structurally where the U.S. and the European Union and China fit in the global economy. So it’s hard to reallocate what we would sell to China or what we buy from China to the EU, because Europe doesn’t buy and sell exactly the same things. And the Canadians are wrestling with this, too now. If we’re going to have a trade war with Canada, and Canada is talking about, we’re going to reallocate our economic relationships away from the U.S., which has historically been 70% of our trading relationship. And now we’re going to shift that to Europe, or we’re going to shift that to other countries. It’s hard to do that at all. And it’s very hard to do that quickly. Right. So you can imagine if we’re in this new world where these types of trade policies become the new permanent over the next five or ten years, then, yes, structurally, things will shift. But in the short term, it’s the uncertainty. Nobody’s going to want to invest in building transatlantic trade that used to go to China if it’s going to get reversed because of new tariff policies in the next six months or the next three years.

Zac Schultz:
All right. Mark Copelovitch from UW-Madison, thanks for your time today.

Mark Copelovitch:
Thanks for having me.