Former Sen. Says Folks Underestimating Coming Tariffs; Worries Crony Capitalism Will Result

Toomey continued: "There’s a lot of discussion that this is a negotiating position, this is blustering, this is how he intends to intimidate counterparts to negotiations, but he’s not going to carry through." He said that's foolish thinking, based on his experience serving as a Republican senator during the first Trump administration, when he spent four years trying to convince Trump that importing is not against U.S. interests.

"In Donald Trump’s mind, a trade deficit is very, very close to the measure of the extent to which your trade partners are stealing from you," Toomey said.

"In my opinion, he has some profoundly misguided notions about trade and deficits and tariffs, but he believes them very strongly. He’s not going to be held back, the way he was in the first term, by people around him who were believers in international trade and restrained his instincts."

Toomey, who is now a board member at Apollo Capital Management, was on a panel that included a former top policy official in the Office of the U.S. Representative under President Joe Biden, a former deputy USTR to the World Trade Organization during the first Trump term, and CFR's director of international economics.

Dennis Shea, the former deputy USTR who represented the U.S. at the WTO, said Trump and his former boss at USTR, Bob Lighthizer, are right that the trade deficit is unsustainable, as it represents the sale of U.S. assets to buy foreign-made goods.

He pooh-poohed Toomey's warning that the tariffs Trump will impose will cause retaliation that Toomey compared to walking into a buzz saw.

Shea said, "If I had a dollar for every time I heard the China tariffs were going to lead to another Smoot-Hawley [style trade war], I’d be very wealthy."

He also said that the U.S. has "had whole entire industries ripped away -- chemicals, electronics, textiles, nuclear -- just gone. Often not as a result of competitive advantage by other countries."

Chemicals are one of the strongest export sectors for the U.S., accounting for approximately 10% of all goods exports, and those exports grew 34% from 2018 to 2022, according to the International Trade Commission. However, the U.S. did import more chemicals than it exported that year, with $326 billion in exports and $442 billion in imports.

Benn Steil, the director of international economics at CFR, expressed sympathy for the concern over capital flows related to the trade deficit, but said there are better ways to manage it, such as changing tax treatment when sovereign wealth funds from abroad buy U.S. companies or real estate.

But he said that the arguments for tariffs -- that they will force companies to reshore operations and protect existing American manufacturing, that they won't raise prices, because they're paid by foreign exporters, and that they'll raise revenue -- are contradictory.

A tariff "can either bring in significant revenue or protect U.S. manufacturing, you can’t do both," he said. In order to protect U.S. manufacturing, the market share for imports drops, so the revenue declines.

Steil agreed with Toomey that Trump will be less restrained on tariffs in his second term, but said, nonetheless, there are voices in his administration arguing for strategic targets instead of tariffs on most or all products. "Those debates will still go on," he said.

The most immediate threat of tariffs is on Feb. 1, and none of the panelists said they knew if there would be 25% tariffs on Mexican and Canadian imports that day.

Heather Hurlburt, a former chief of staff to USTR Katherine Tai, said that if the tariffs are imposed at that level, "either they won’t be on for very long, or they will immediately be significantly exemptioned and caveated the minute that the markets react to what that means for the auto industry, for energy and several other major sectors."

Toomey said the compensation for farmers hit by retaliation in the first Trump administration was "a terrible policy," and that's one of his many concerns about a second Trump trade war.

In response to a question from International Trade Today on whether certain CEOs or politically connected firms will be able to get their products carved out from tariff programs, Toomey said, "I don't know how that's all gonna play out, but I think this protectionism and the use of tariffs, the abuse of the national security provision as a justification, I think it is very likely to lead into all kinds of abuses, all kinds of opportunities for crony capitalism. And I do worry about that."

In a brief interview after the panel, Toomey said he thinks senators will push back against Trump's tariffs, but he doesn't think they will do so before they are implemented, as they did when Trump threatened to withdraw from NAFTA.

"Do members of Congress anticipate the enormous problems that we're going to create for American manufacturers who have to import components, and, those components becoming more expensive makes them less competitive? Or does it have to occur? I think it has to occur," he said.

Shea, in contrast, expects more protectionism from Congress, such as no longer allowing China most favored nation status.

"I could see WTO withdrawal potentially having more legs," he said.

Steil said: "I’m extremely pessimistic about the survival of the WTO." He said with Trump using national security as a rationale for tariffs and quotas, "the developing world learned this is a get out of jail free card for protectionism." He said countries have erected barriers to the import of alcoholic beverages, door frames and the beans used to make chocolate, all under the guise of national security.

"I don’t know the technical term for it in trade law," he quipped. "We economists call it bullshit."