Last June, more than a thousand LinkedIn members congratulated Christopher Padilla on his retirement from IBM, where for 15 years he had served as global head of government and regulatory affairs. To read through the comments his post inspired—from leaders across industry and government—is to marvel at the respect Padilla commands for his knowledge of tariffs and trade.
Before joining IBM, Padilla held various senior roles in the Commerce Department under President George W. Bush, including Under Secretary of Commerce for International Trade, and Assistant Secretary of Commerce for Export Administration, both Senate-confirmed positions.
Now a Brunswick Senior Advisor, Padilla these days is encountering unprecedented demand for his expertise. Here he shares his thoughts about President Trump’s trade-and-tariffs strategies in an interview with Courtney Chiang Dorman, Brunswick Managing Partner of the Americas, and Brunswick Senior Partner Don Baer.
Like people everywhere, our clients are living through unusual if not unprecedented chaos and volatility with regard to trade and tariffs. How do our clients protect their interests? Is there a way amid such uncertainty for them to advance their interests?
The first rule of thumb is to watch what the president does, and don’t be too distracted by what he says. In the past week, you’ve seen the president announce tariffs, announce increases in tariffs, then 24 or 48 hours later, agree to a pause or a partial pause.
This makes it very difficult for business to plan. But when it comes to tariffs, there are strategies that companies can use. Stockpiling, for example, drove a major increase in imports into the United States in the first couple of months of this year. Other strategies would include finding suppliers in countries that aren’t hit by tariffs, at least not yet. There are pricing strategies that can be used.
The most important thing though is not to make major capital investment decisions about new factories in the United States until the picture becomes a little clearer. What we have learned is that things can change very, very quickly.
Despite the chaos and uncertainty, are there lessons businesses can and should take from the early days of the Trump Administration?
In the first six weeks or so of the second Trump Administration, we’ve learned that this trade war is much bigger and broader than what happened in President Trump’s first term. The amount of trade impacted is more than four times greater than what we saw in the first term.
And a much broader range of products are being hit by tariffs. In the first term, it was mostly parts and components imported from China for use in US factories, and some things like steel sheets also used in domestic manufacturing. This time, consumer products are being hit directly, things like mobile phones, tablets, laptop computers, stainless steel cookware. Yesterday, even steak knives got hit.
We’ve also learned that corporate brand reputation is at risk. In Canada, for example, American whiskey and spirits are being taken off the shelves. In that industry, CEOs are saying, “That’s worse than a tariff because it hurts my brand image.” US companies are facing brand risk outside the US, including possibly in Europe.
Finally, companies can ask for pauses or exceptions. We’ve seen that in the auto industry. We’ve seen it in the steel sector. So far, there’s only been a couple of 30-day pauses granted. But as the economic cost of these tariffs increase, I think the likelihood increases that there will be more exceptions granted.
If a company thinks there’s no way out, I would say don’t be so sure. Be persistent. Keep making your case because the president has shown he’s prepared to change policy quickly.
To build support within the administration, some companies have said they’re investing billions in new factories to create jobs in America. How effective is that strategy?
I would advise clients to strongly consider it. It makes sense. In response to questions this week about the stock market decline, the White House has cited company after company that has announced investments in America. The White House clearly puts a premium on that kind of announcement, which makes it a useful option for companies.
Now, I’m not sure it’ll necessarily buy an exception from tariffs, at least up front. But what it will buy is goodwill, so that if, down the road, there’s a change in policy, those companies will probably be at the front of the line to be heard for whatever exceptions or changes they want to request.
In the same way, companies worried about boycotts in Canada or Europe or other places should be emphasizing their local roots in those markets. For instance: “We may have an American flag over our headquarters, but we are heavily invested in Canada.” Particularly in consumer-focused industries, that kind of communication is vital now.
If a company thinks there’s no way out, I would say don’t be so sure. Be persistent.
Even as companies announce plans for capital investment, your advice would be to take baby steps toward executing those plans?
Exactly. An announcement can be things that you plan to do. It can also be things you’ve already done. If you look at the announcements that the White House has been trumpeting, in fact, some of them involve things that are already under way or that have been previously announced. To the extent that it can be packaged and sold by the White House as a win, that’s a positive thing for companies.
What I would be more careful about is longer-term decisions like saying, “Well, there’s going to be tariffs, so we better build three more factories in the United States.” I think most companies are, frankly, sitting on their hands right now when it comes to major investment decisions. And they should. Because the policies are so unpredictable—and could change tomorrow—that it may not make sense at this point to consider those kinds of long-term capital investment decisions.
What can you tell us about April 2nd?
The president has said that more tariffs are coming on April 2nd. Basically, the president has said, “What they charge us, we will charge them.”
The anticipated announcement on April 2nd has been described as “the big one.” But when you look at the actual memo from the president, it’s more measured. What he says is, “we want a study of foreign trade barriers and a strategy on April 2nd for how to reduce those. And maybe we use tariff threats to do it.”
This could go one of two ways. The government could say, “Here are some countries that have high trade barriers, and we’re going to negotiate to reduce them.” The goal of that is to reduce foreign barriers and to get more market access, more exports for US companies. That would be a good outcome.
The other alternative is the president saying, “I’m going to apply a blanket X% tariff on everything from India because they charge us. No negotiation. I’m going to apply the tariff on April 2nd.” The goal there would be, “I want everybody to move their manufacturing back to the United States.”
For that strategy to work, for us to have massive reshoring of manufacturing, tariffs would need to be very high and stay in place for a very long time. That would be a bad outcome for most businesses and for the economy.
Business, of course, is urging, “Let’s use tariffs as leverage to open markets and expand sales. Let’s not use them to try to take the economy back to 1956.”
Is the era of free trade coming to an end?
Possibly, at least in the way that we used to know it. What free trade used to mean was that the US would actively seek to bring down trade barriers, both in the US and in foreign countries. We had an aggressive trade agenda to do that.
At times during the free trade era, we used tariffs or threats of tariffs to urge foreign countries to open their markets and reduce barriers. Now what we’re hearing from the president’s advisors is they want to use tariffs the way that India used them in the 1960s and ’70s, or the way Brazil tried to use them, or frankly the way the Ming Dynasty in China tried to use them, which is economic isolationism.
Under that strategy the goal is to make everything here, from T-shirts to the most advanced semiconductors. That kind of economic transformation would be extremely disruptive, extremely painful and very costly.
The president is using the language of wanting to bring back almost all manufacturing and to minimize commerce with other countries, and he is saying we should be willing to tolerate near-term economic pain to achieve this. That’s what has markets and CEOs concerned. Again, though, let’s watch what he does rather than what he says.
Some advisors are urging the president to use the threat of tariffs to break down barriers in India and Europe and other places. If that’s where we get to, then I would say we’re back to an era of negotiated trade, not free trade. But it’s better than economic isolationism.
The policies are so unpredictable—and could change tomorrow—that it may not make sense at this point to consider long-term capital investment decisions.
The Trump Administration has been vocal about rebuilding the American manufacturing base that disappeared over the last several decades. Is that really what these trade and tariff actions are about?
It’s mostly about that. That’s what the president campaigned on. He said during the campaign that he was going to impose these tariffs in order to bring back manufacturing. That’s a big part of what this is about. Particularly in some of these industries we’ve talked about—auto, semiconductors, pharma—the strategy is to drive manufacturing back to the US. But you still need inputs. And most of those inputs come from outside the United States. That was the case even when manufacturing was a bigger part of the US economy.
For example, the president wants to have a domestic shipbuilding industry. That’s fine. But if you’ve just increased the price of steel by 25%, how competitive would an American shipbuilding industry be if they’re paying 25% more for steel than the Korean, Japanese, or Chinese shipyards?
It’s a bit more complex than just bringing back jobs. But I do think that’s a big part of the politics. What we are going to find out, and what I think the president is testing, is how much are Americans prepared to pay to achieve that made-in-America vision? Are they prepared to pay $10,000 to $15,000 more for a car or a truck? Are they prepared to pay $2,500 to $3,000 for a phone if that’s the price to make it in the United States?
What is your best- and worst-case scenario?
My best case is that on April 2nd the administration identifies a number of priority foreign countries that it wants to negotiate with, puts out a threatened tariff number, but doesn’t implement it right away, and instead opens a negotiation that leads to the reduction of foreign trade barriers.
If we had that outcome, it would look a lot like what US trade policy looked like in the late 1980s and early 1990s when we did conduct these kinds of negotiations with foreign countries. We threatened tariffs. We sometimes imposed them. But the goal was to open foreign markets. That would be a good outcome.
The worst-case outcome is that we get essentially a universal tariff of somewhere in the neighborhood of 25% to 30% on the vast majority of imports to the United States. A universal tariff that applied to all products in all countries would leave business with the least flexibility. The only way to get around that is to go in and argue for exceptions. You can’t just shift the production to another country. You can stockpile for a while. But eventually you’re going to run out of inventory.
Might the market declines affect policy?
Those declines suggest that the market believes the goal here is to put the economy through a wrenching change to re-shore manufacturing in industries in which, frankly, we are just not globally competitive.
But if the president wasn’t sensitive to the market, we wouldn’t have seen the chaos we’ve seen in the last two weeks. We wouldn’t have seen tariffs imposed on Canada and Mexico, and then paused 24 hours later, because the market shuddered and the auto industry complained.
I do think there is sensitivity to the markets and particularly to core things like inflation and GDP growth. It’s going to take some time for the effects to show up in those numbers. When it does, we might see a course correction.
What’s the end game?
Nobody knows. That’s the problem. We’re going to find out.
In the image above, Christopher Padilla, then-US Under Secretary of Commerce for International Trade, met with the Honduran government in 2008 about the Free Trade Agreement.