I'm Dan Kurtz-Phalen and this is the Foreign Affairs Interview.
What we're seeing is because the president has used tariffs unconstrained by congressional oversight, every time there is an irritant internationally, whether it is a former leader that is brought before a court case on corruption charges in the case of Brazil or now the desire to purchase Greenland, the president just uses tariffs in a punitive way. I don't think our allies anticipated that this would be the America that they depended on since the Second World War.
In the past year, Donald Trump has upended the global trading system and used American economic power like no president in recent memory. He's imposed tariffs to force other countries to fall into line on everything from commercial issues to geopolitical disputes like this week's threats against NATO partners over Greenland. He's called into question the role of the dollar. And at home, he's attacked the independence of the Federal Reserve and intervened in private sector decision-making.
Lael Brainard served as director of the National Economic Council in the Biden administration and before that as vice chair of the Federal Reserve. I wanted to speak to her not so much about the short-term consequences of Trump's policies, but about what they would mean for US power and prosperity in the long term. She's taken on that question in recent pieces for Foreign Affairs. And in our conversation, she stressed not just the risks posed by Trump's economic agenda, but the bigger changes necessary to sustain American economic success into the future.
Lael, thank you for doing this. There's a huge amount I'm eager to get your perspective on, from the state of the global economy to the future of the Federal Reserve and much else. Some of that you've written on in Foreign Affairs in recent months. All of it you've worked on in senior jobs in the US government in recent years at Treasury, at the White House, and at the Fed. So, we're thrilled to have you here at this moment in history.
Well, I'm delighted to be here.
We're recording this exactly one year into Trump's second term and his use of tariffs and aggressive use of American economic power more generally has been one of the most prominent parts of both his economic policy and also his foreign policy in the past year. How do you assess the consequences of Trump's trade policy and especially that use of tariffs for the global and US economies that you're in?
Well, I think that President Trump's use of tariffs, overuse of tariffs as his first and last tool internationally really for every agenda that he has, has been calamitous. Calamitous in the sense that we now have ruptured long-standing relationships of trust with important allies around the world. And it means that they will now start to form coalitions to pursue their own interest because they believe they no longer can rely on the US to be a dependable ally. And so I think it's going to be enormously costly in terms of our national security, our ability to rely on alliances which are a much lower cost way of guaranteeing American security. But it's also of course been very disruptive on the domestic front, raising prices on a lot of consumer goods at a time when affordability was already top of mind and raising prices on inputs for American manufacturers. So that American manufacturers are actually worse off today than they were a year ago as a result of those tariffs on net.
If we focus on the global side of that, I've been surprised by both the submissiveness, you could say, of traditional American partners' response, especially from allies and partners, and the aggressiveness, the effective aggressiveness, frankly, from China in particular. Starting with the former, did it strike you that the allies were unprepared for this second term economic policy? Were you surprised by their relative quiescence when it came to trade negotiations and responding to tariffs more generally?
Absolutely. I think our allies were backfooted. Did not expect this aggressive tariff policy to centrally affect allies. The first Trump term was focused on China. It was a set of tariffs. They were broad brush across many goods in China that are not particularly strategic, but they were broadly in line with strategic goals of American policy at that juncture, which was countering China's mercantilist practices and trying to rebalance and level the playing field so that America's factory towns had a chance. That is not the Trump 2.0 tariff policy. Trump 2.0 tariff policy domestically is first and foremost about raising large amounts of revenue from tariffs. So the administration keeps talking about 300 to 400 billion dollars of tariff revenues to compensate for some of the lost revenues associated with the so-called big beautiful bill. The result of that and in part because China in the intervening period has gotten quite good at wielding retaliatory measures of its own particularly surrounding rare earths is that allies in some cases partners in others actually have higher tariffs on average than China does. So you look at a case of Switzerland, 39% tariffs. It's really a headscratcher unless you go back to that revenue goal. And now what we're seeing is because the president has used tariffs unconstrained by congressional oversight, every time there is an irritant internationally, whether it is a former leader that is brought before a court case on corruption charges in the case of Brazil or now the desire to purchase Greenland, the president just uses tariffs in a punitive way. I don't think our allies anticipated that this would be the America that they've depended on since the Second World War, that it would pursue this kind of feckless international policy.
As you look at these escalating tensions over Greenland, which you mentioned, the Europeans seem to be promising a more aggressive response than they had last time around and after Liberation Day in April. What do you expect that might look like? And do they have, let's put this in Trumpian terms, do they have any cards to play here?
Well, they certainly do have important cards to play. America has incredible business interests in Europe with American multinationals, very prominent in most of the markets that the president is now targeting, including important ally the UK, which only a few months ago he was sort of singling out for special treatment only a 10% tariff. Still very high but because they have a surplus and we're working so well with the United States. The other thing of course is we have massive inward investment by European companies, by European car companies for instance, they employ a lot of Americans manufacturing, assembling cars, all of those things really are now being questioned. And of course we also depend on Japan and Europe, foreign allies, to hold a lot of US Treasury securities at the same time. The Trump administration has increased the national debt by $4 trillion, which means we need a lot of investors to be willing to hold Treasury securities. We are also using tariffs as a punitive mechanism, the president is, to advance his goals in a way that will potentially make foreigners a little bit more wary about the value of those Treasury securities and the desirability of holding them.
If we go back a year, if we went back to the beginning of the Trump term and knew everything that we were likely to see over the ensuing months, I think most people would have predicted much worse results for both the US economy and the global economy at this point and would have predicted that some of these warnings that you're issuing now would have already come to pass. Why haven't they? Why has there been less impact in at least the near-term economic statistics again both domestically and globally than we would have expected if we'd gone back a year?
Well, I think there has actually been quite a dampening effect on the US economy. First of all, I mean, we saw that inflation had been coming down. It was, you know, going into the 2 to 2 1/2% range at the end of 2024 before the beginning of the Trump administration and that turned around, moved up to 3% and the tariff effect has not peaked. So it essentially meant that interest rates couldn't come down by as much and that had a slowing effect on in particular the housing market. But the other thing is if you look at growth for a good part of the year and the OECD has some good numbers, growth would actually have been slightly negative but for the AI boom and it's really the AI boom that has masked the deleterious effects of the tariffs on aggregate. So we do have very robust growth in the third quarter, but it's jobless growth. That jobless growth in part is because manufacturers shed thousands of jobs over the course of the year because their input costs went up and because they were cautious about consumers being willing to pay more. The other thing of course that masked the effect of the tariffs is American businesses just got smarter. They had just gone through the pandemic, massive supply shock, and they learned that they need to be very quick, agile about shifting around their supply chains, but also brought in a massive amount of imports in anticipation of those Liberation Day tariffs in the first quarter. Actually, you saw this massive runup in the trade deficit in the first quarter and then over the rest of the year, you saw those inventories and the trade deficit really just moderating as those inventories of imported products were brought down.
You noted the lack of real congressional action on tariffs. We have been waiting for the last several days for a ruling from the Supreme Court on Trump's use of the International Emergency Economic Powers Act as a rationale for some of his tariffs. Do you expect a ruling against Trump on that? And will that have any constraining effect or will he merely pick some other tool?
Yeah. So this Supreme Court decision on the president's highly unusual, in fact unprecedented, use of this national security law IEEPA to impose tariffs is enormously important and the hearing where the Supreme Court justices publicly questioned both the administration and the plaintiffs about the underlying statutory authority did suggest a majority of justices had substantial skepticism about whether in fact it was ever intended to allow for tariffs. Tariffs are a revenue measure. Revenue measures are the purview of Congress and Congress has delegated substantial tariff authority, substantial revenue tariff authority to the president but not in that statute. So it did feel that the Supreme Court was skeptical. On the other hand, in case after case, the Supreme Court has given a very expansive interpretation to the executive branch's authority. So I don't know where they're going to end up. It does seem very strongly that they should constrain the president's ability to use IEEPA. And I think there are a host of important questions there about refunds and how that will affect revenues and companies. But in terms of the president's power, if the Supreme Court narrows or completely constrains the president's ability to impose tariffs under IEEPA, that would be extremely important because that has been his interpretation that he has complete discretion to impose a tariff on any country for any reason by coming up with some kind of an emergency has been what's allowed him to wield tariffs with such immediate effect. It is the case, you asked about what alternative authorities are available to the president. The administration could very rapidly put in place a successor set of tariffs that would effectively come close to replicating the revenue effects. So section 122 is authority that when we have an exigency associated with our trade deficit, the president can impose 15% tariffs on countries for a period or 10 to 15% for a period of 150 days. That would allow them to quickly replace a large portion of the revenue that's coming in for the IEEPA tariffs. Not all of it because some of those countries like Switzerland are subject to 39% tariffs or India much higher, Brazil much higher. So the other problem with 122 is that Congress would actually need to, most people interpret the law as requiring Congress to actively pass legislation after that 150 days is over to renew it. But the president has other authorities. He's already taking a number of sectoral cases under 232 authority like on steel and autos have already gone through, semiconductors, lumber and pharmaceuticals. So a lot of sectors could find themselves with tariffs and then of course section 301 has already been used for China both in the first Trump and Biden administrations. So a lot of those section 301 tariffs will simply replace IEEPA tariffs to the extent that's necessary and there's an active ongoing case with Brazil. They can quickly put in place a number of section 301 cases on countries. The only thing there that will require a little bit of time is there's a lot more procedural requirements about making the proposed tariffs publicly available and allowing for comment. So there's some time frame in there that would be necessary for most countries to undergo that 301 process. But of course with the 15% tariffs in place under section 122 that gives them the window that they need.
So if I'm understanding you correctly, even if there is a ruling against the administration it wouldn't massively change the tariff regime and the tools that Trump has at his disposal.
It would change the tools in a material way and it would slightly constrain the tariffs, but through a patchwork of other authorities, they can come close to replicating the revenue effects. The reason I say the tools do matter here, though, is the president's ability to simply say, you know, I'm peeved about your response on Greenland. So, I'm just going to start imposing a 10% tariff and then it's going to escalate to 25% on you, you know, eight countries. If the Supreme Court narrows or eliminates the ability to use tariffs under IEEPA, that discretion could be massively constrained.
I've been surprised in talking to people who were in senior policymaking jobs in previous administrations, including some of your colleagues in the Biden administration, that they've watched Trump over the last year and said, 'While we disagree with this, I wish we'd been a little more creative about the use of some of these tools and willing to use kind of power in ways and develop leverage in ways that we weren't.' I think about a conversation we had on this podcast with Juan Gonzalez who was running Latin America policy at the NSC in the Biden administration who said, you know, I wonder if we should have thought about stationing warships off the coast of Venezuela during the election in 2024, just to cite one example. Can you imagine using tariffs perhaps more aggressively or more agile than has traditionally been the case in American foreign policy? Perhaps for different ends, but you know, learning a little bit from Trump about how to use some of these tools. Is there any positive lesson here?
So I think there are some positive lessons on the domestic front about expediting process. Let me just say though I think under the Biden administration tariffs were used pretty aggressively with China and I think they were used more intelligently with China because they were coupled with domestic incentives. So it's not enough to simply put in place, which the Biden administration did, 100% tariffs on cars. They have to be coupled with incentives for instance to the extent that new assembly plants are needed for EV manufacturer or for battery manufacturer that the playing field with China is so unlevel because of the very distorted statist model they have that you in order to have smart policy you need to have the combination of much more targeted tariffs like why high tariffs on baby clothes. That's not a strategic industry. We want cheap, affordable baby clothes for American parents who are struggling with affordability. So, it's got to be targeted on strategic industries like batteries, like semiconductors. And then it needs to be coupled with domestic incentives in those same areas as well as with really tough and smart tech controls. So tariffs, I think the Biden administration was really developing with bipartisan support a kind of smart approach there. Where I do think this administration has been able to push aggressively, much more rapidly is in areas like permitting where it just took too long to get some of these infrastructure projects and investments up and running. And in calling out some of the areas where the affordability challenges are greatest, getting the private sector to kind of come to the table. So, I don't think this administration is ultimately going to be putting in place a 10% cap on credit card fees because that does have massive disruption effects on the industry. But I think getting the industry to the table to talk about how is it possible that at a time when interest rates are down below 4% that you're charging 22% on credit cards, that's not acceptable. So I do think a tougher approach, on the other hand running roughshod over Congress, no, I don't think that's the right way to go.
I want to come back to some of these affordability questions later in our conversation, but I also want to focus on China a bit. In contrast to the response from allies and partners in response to Trump's tariffs and other trade actions in recent months, China has been quite aggressive, especially in its use of its control of the critical mineral supply chain. Have you been surprised by China's response? Have you been surprised by both the effectiveness and the assertiveness of it?
I have not been surprised. I think anybody watching China closely and we both know a number of really impressive people who watch this space very closely and are quite good at charting just how effectively she has built out a regime of countervailing pressures and over the years how single-mindedly they have focused on dominating strategic industries in a variety of areas, but in particular rare earths and just that stranglehold on rare earths and rare earths processing, rare earth magnets is something that I think people have been watching over a period of time. And so in that sense, no, it should not have been a surprise. What is disappointing is that as a country, we have been slow to put in place really effective responses. We do have a handful of private sector companies both in the US and abroad who have tried to make a go of first rare earths mining and processing and they have a very difficult time sustaining themselves through market financing because China's producers regularly dump product in such a way that it makes it unprofitable on a pure market basis to continue developing rare earths processing at scale. And so that's where we need to use the Defense Production Act. We need to actually subsidize as well as we really should be talking about long-term demand contracts to make those businesses sustainable. And we should be talking about allies and partners. This is not a go it alone space. Our allies and partners have suffered the same kinds of coercion. We talked about it a huge amount in the previous administration. China's use of economic coercion. That's an area where working with allies and partners is paramount.
I think I was in the State Department a decade and a half ago when China first used its control over rare earths against Japan in response to disputes over unrelated issues. This has been a big topic of conversation since then through the first Trump and Biden administrations. It's striking how little progress we seem to have made as you note in really doing anything to counter it. If you could go back to administrations which you've served, if you could account for that failure, what have we gotten wrong? What explains it? And what do we need to do fundamentally differently to be in a better position the next time we're in one of these exchanges?
Yeah. So, I think first of all, we need bipartisan continuity between administrations. We can't, you know, rediscover this national security imperative every time there's a new administration, rip up the old playbook and start again. We need to build on a consistent policy that is one of China's greatest strengths. Is the continuity that they have over much longer periods of time. The absolutely clear lesson from the past two decades. I agree with you. I was in the international part of the Treasury Department during that time on the economic side. But we had many conversations about this area. So I think what we started to develop was the ability more recently is the ability to provide tax credits that provide a more profitable prospect for private companies that want to make long-term investments in rare earths mining. As well importantly in processing. So you need investment tax credits, you need production tax credits in some cases, loan guarantees can be helpful or grants in some cases and then that use of defense production authority to provide that financing is a very powerful tool. And on top of that, these companies in order to withstand the vagaries of Chinese dumping, which means that prices go through these massive cycles, and that is very hard to sustain when you have high fixed costs. So, it's really important to have long-term guaranteed demand. And of course, the defense department can provide some of that potentially not at scale. And so you kind of need to sit down with the industry with the automakers and you need to get them to augment that long-term dedicated demand. No, we're not going to switch to Chinese producers the minute their price becomes more attractive. We're really going to stick with this. And you know, I think at least one of our auto companies actually did make some far-sighted co-investments in some rare earth capacity, but I don't think we supported them as much as we needed to at the time.
In a few months, Trump is supposed to travel to China, I believe, in April for a summit with Xi Jinping. A big economic deal is supposed to be the centerpiece of that visit. What would a good deal look like to your mind?
Well, I think we already have given up a bit of leverage in terms of our technology export controls. So one of the most important strategic areas where the US has some advantage but it won't last unless we really work hard to preserve and protect it is in the area of generative AI frontier models and in looking at the relative strengths of the two countries China and the US who are really driving forward the AI frontier here. Our relative strength really has to do with those LLMs and with very advanced semiconductors of the sort that have gotten caught up in technology export controls. China has massive scale advantages. It has the ability to use its scale and sort of intense competition among various big players in the Chinese market to drive diffusion and to get models that are usable out and test them and augment them and its other really big advantage is massive advantage on electricity costs. So we have to husband our advantage very carefully. And what happened when the two leaders met in Seoul unfortunately is that the president found himself countered on our technology export controls with the rare earth controls that the Chinese had put in place. Really again ceded ground, showed willingness to relax those potential export controls and more recently has offered a more advanced chip with upside sharing on the part of the US government which is the last thing in the world we should be doing. What we should be doing is focusing on controlling those very advanced semiconductors in order to sustain that advantage. The revenues to the US government. It just seems like a kind of very odd diversion away from our traditional approach.
