Trade War ‘Chaos’: How Bad Could The Economic Fallout Get? | Phil Magness

**Phillip W. Magness** (0:00)
Trump backed down from his original Liberation Day schedule. Well, what happened? The stock market crashed, and the bond market went haywire. Rather than boosting manufacturing, it slowed down vis-a-vis what was already happening under the Biden presidency, or even Trump's first term in office. I think we're in a position of chaos for the administration.

**David Lin** (0:19)
Phil Magness returns to show he's a senior research fellow at the Independent Institute. On the agenda today, trade wars, heating up again, or just bluster. Welcome back to the show, Phil. Good to see you again.

**Phillip W. Magness** (0:30)
Yeah, good to see you as well.

**David Lin** (0:31)
As you recall, last week, Canada retaliated against US tariffs on $20 billion worth of US imports. This is matching pretty much dollar for dollar, as Prime Minister Carney would say, to what the US imposed the prior weekend, which is 50% tariffs on roughly $20 billion worth of Canadian imports to the US. Canada has a much smaller economy than the US, obviously, so this affects Canada a bit more than the US. Of course, the Trump administration knows this. The question is why they're choosing to escalate this at this particular time. The trade deals between Carney and his negotiators in Trump and his negotiators fell apart the previous week.
But one could argue that it was a game of statements, statementship to up the ante and escalate the trade war instead of simply postponing negotiations. What's going on, do you think?

**Phillip W. Magness** (1:28)
Well, I think that's exactly the case here. This is both sides are playing politics. Now Trump I think is using Canada as a test case. So he has dug deep into the statute books after the courts blocked them last February on the IEPA emergency power he was trying to use to put in tariffs in place. And he's found this old clause called Section 338 of the Smoot-Hawley Act of 1930 And it's the famous one that basically exacerbated the Great Depression. And this law is technically still on the books, but it's been superseded by some other subsequent trade laws. But it permits the president or originally permitted the president to impose tariffs of up to 50% on other countries that discriminate against the United States commerce.
Now it's in a very dubious legal standing because later legislation added more definitions of what this meant to discriminate against US commerce and put in stricter regulations upon that. So Trump is basically reaching deep into history to try to resuscitate what was essentially a dead letter or a superseded clause. And I think he's doing this on Canada as a test case to see if he could use this clause elsewhere as his plan B after the Supreme Court and other courts have invalidated some of his tariff options.

**David Lin** (2:47)
What do you think is going to be the result of the 50% tariffs placed on both sides? Do you think it will escalate to potentially more tariffs? Or do you think this will die down by the midterms?

**Phillip W. Magness** (2:59)
So there's the great question, though. I think really the ball is in Canada's court on this because they have been trying to target goods that affect border states with Canada, like Michigan, that has a heated open Senate race. So I think they are actually very aware of what happens in the midterms and they are thinking, hey, a Democrat would be more friendly to them on the trade issue than Republicans have been so far. But I think there's also a mistake that Prime Minister Carney is making here because remember that clause that Section 338 depends on discriminatory actions against the United States by another country. Well, by upping the ante and putting retaliatory tariffs in place, Carney has essentially become a self-fulfilling profit. He's enabled the Trump administration by giving them exactly the type of pretext that they previously didn't have. US trade and Canadian trade was relatively open and free, even with the previous round of tariffs in place prior to these events. Now, Carney is saying, all right, well, we're going to supply a retaliatory tariff. Well, Trump will take that to court and he'll argue, see what Canada is in fact discriminating against us even though we started it.
So I think Carney is making a mistake on the legal front here that could backfire on him.

**David Lin** (4:21)
Is it true? Let's just fact check this. JD. Vance at a press conference, I think in Maine, said that Canada and China were the only countries to have retaliated against the US on the trade war. Is that true?

**Phillip W. Magness** (4:32)