With Oren Cass (Chief Economist, American Compass) and Sander Tordoir (Chief Economist, CER). Hosted by Cristina Caffarra. Recorded Friday 11 July.

Watch the episode here

Cristina Caffarra (CC): Welcome to Escape Forward. I’m Cristina Caffarra. I’m delighted to be starting this podcast, which is a discussion with people I enjoy and I learn a lot from. And it’s called “Escape Forward” because I really don’t see how one can formulate antitrust policy, which is my original field, without reaching out into other economic policy areas: as I keep saying, antitrust should not be an island, not a specialist discipline just for lawyers and nerds with its own esoteric, mostly bogus rituals – but should be much more aware of what else happens around us and affects how markets behave. And there is no better proof that “everything links” than the discussion we are having today on “American First”, tariffs and trade, which one might think is very far from antitrust but for instance is now quite intimately bound with the way antitrust regulation enforcement in Europe against Big Tech companies is going to unfold. Because realistically going easy on them or abandoning what some call the “non-tariff attacks” on US tech companies is known to be part of the negotiations right now on tariff levels.

I’m delighted to discuss this today with Oren Cass, Chief Economist at American Compass, a conservative US think-tank close to the Republican leadership; and Sander Tordoir, Chief Economist at the Centre for European Reform, a very respected European think tank on economic policy, with very sharp insights on what is really going on.

Let me start with you, Oren. We are recording this episode at a time of deep uncertainty globally, but in Europe too, on what is happening on tariffs. We had “Liberation Day” in early April, then tariffs were paused for 90 days to calm markets somewhat, the deadline just expired, there’s a new deadline of August 1st. And in that time, there’s been a partial UK deal with the US administration, there’s been one Vietnam deal two months later, and lots of “letters” sent around this week by the Administration to various countries.

 

At this point in time, it’s unclear what’s happening to Europe. We appear to be still negotiating, but whatever the status of that, the world is clearly in some turmoil. And there is a view, certainly in Europe, that all of this has no real economic rationale. It’s all to do with President Trump’s whims. It’s not economics. It’s all about power.

Where I want to start with you is indeed the question of the economic rationale. Because regardless of how things look now, of zigzagging or holding things off or starting again, the idea of using tariffs had an economic motivation and a pedigree originally. The instrument is controversial, but at a very high level, the notion of “America First” was about revisiting the consensus that we need free trade, we need absolute globalization; fundamentally because it has been recognised that that paradigm hadn’t worked well for the American people, leading to loss of jobs and of offshoring of production that wasn’t really in the interest of the country. So we were told there’s a trade system which is highly unbalanced, we need a new kind of consensus, a new Bretton Woods, rethinking even the role of the dollar as the reserve currency. We had papers that were expanding on this idea from an economic point of view. Stephen Miran, now chair of the Council of Economic Advisors, has written on this. You’ve written on this extensively. So take us through it. What was and is the economic rationale for using this tool?

Oren Cass (OC): Thank you for having me. This is a great opportunity and perfect timing for this discussion, and really looking forward to talking with Sander about it as well.

I think the best place to start probably is just to recognize what U.S. policy has been since the end of World War II. There was a strong point of view that the U.S. was going to be the leader initially of the Western anti-communist world. And then with the end of the Cold War, that the U.S. was going to be a global hegemon. It’s fascinating to go back and read what strategists were thinking in the 1990s and the extent to which they believed not only that it was the “end of history” and everyone was going to become a liberal democracy, but also that the US was going to be the unchallenged hegemon and would bear a range of burdens on behalf of the world and in return get the benefits of that position. And we could have a long discussion about how long that was actually a good idea for, and when it might have stopped working.

I think it’s safe to say that by the time you get into the 2000s and the 2010s, that turned out just not to be a sustainable arrangement. For one thing, other countries really increasingly abused the open American market. And yes, that’s the mercantilist East Asian economies. But frankly, it’s also the EU and the attitude of European leaders. The U.S. was bearing increasing costs and seeing declining benefits of the arrangement. And the idea that we will have an open American market, essentially no matter what, and maybe we’ll ask nicely if we don’t like something someone else is doing, but we have no actual credible stick to use – is now gone. And that the most important way to understand what is underway in the Trump Administration goes back to what Secretary of State Rubio said probably within his first week of taking office: that simply as a descriptive matter, the “unipolar” world is over and this isn’t a normative question of what should happen, what we wish would happen, what we think would be best. It’s simply a description that the US no longer plays that role in the world.

And so what I think US policymakers are really focused on doing right now is in the technical terminology of negotiation, they are changing the best alternative to a negotiated agreement.

It has always been understood that the US might ask for things and if it doesn’t get them,  there’s still an open American market for everybody. And what I think the Trump Administration has successfully done is said “that is over”. We have some things we are going to ask for. We in fact have more things we are going to ask for. And if we don’t get them, we don’t think the best alternative is just shrugging and offering an open market anyway. We actually believe the best alternative is now closing off the market. We would love to have an open market for allies who treat us fairly, who are committed to balanced trade, who bear their share of the defense burden, who also commit to keeping China out. But that is no longer a free ride.

And you’re seeing a lot of countries, including very close allies, very frustrated with this. They liked the free ride a lot better. But I think as they come to understand that it really is over, there is going to be a lot of space for agreements that certainly serve US interests better, but are also a lot better for these allies than any other options they might have.

CC:  To follow up, you see language suggesting the way these allies were behaving towards the United States was unfair and the outcome wasn’t favorable to the United States. Can you clarify how you think allies like Europe were behaving unfairly?

OC:  I think there are probably three elements to it.

One is restricted market access for US firms in Asia. That came down to sometimes high tariffs, sometimes non-tariff barriers, but certainly US access to obviously the Chinese market, but also the Japanese market, the Korean market was never anything like the access that those firms in those countries had to the US market.

A second element is conversely the very mercantilist export-led policies that other countries were pursuing. Germany is certainly among the leaders in that. Relative to the size of Germany’s economy, the export surplus it runs is right up there with what China runs. And we can debate whether or not that’s a good economic strategy for Germany. But when you have countries like Germany, like Japan, like Korea, essentially suppressing their own domestic consumption, suppressing their consumption of American goods and really trying to promote their exports into the American market, running trade surpluses and taking back American assets instead of American goods. That is something that in the short run was great for American consumers, but in the long run has obviously been very damaging to the underlying health of the American economy.

And then the third piece, where you see Europe much more prominently in the lead is in essentially unfair treatment of US companies. You mentioned Big Tech, some of the efforts at regulating them. I think another really interesting example is in the context of pharma, where there’s an assumption that the US will essentially pay the full cost of the world’s drug development and everyone else just gets the drugs for free. None of that is acceptable or sustainable or consistent with a genuine free trading system. And so what the US is rightly saying to rest of the world and certainly to Europe is, look, we actually are the center of most of the innovation that you are so interested in. We are the market that you are overwhelmingly reliant on in a lot of cases to support your own economic priorities. And we would like to balance that. We would like to make sure that this is actually instead an arrangement in which the long-term interests of the U.S. are being served as well.

CC:  That’s very clear. Sander: Europe is a major block at the receiving end (with great apprehension) of this complete upending of US policy, and the notion that we need to rebalance our surplus towards the US in a way that is much less favorable. There’s a sense of course in Europe that this is going to hurt and it’s going to hurt bad and not just us but the world in general. And there’s also a sense of apprehension because we don’t seem to be able to exercise much bargaining power at the moment in negotiations. It’s unclear what is happening but there is also information around of individual companies (for example the German car companies) trying to negotiate directly with the US Administration in a way that is upsetting European capitals because this weakens the overall bargaining power. But the reality is that at the moment we have 70 % of goods exported to the US from Europe which is subject to tariffs, and some of these are up to 50 % and there is a talk of something quite dramatic on pharma. So having heard what Oren says. What can we hope for? Should we retaliate in any way? Is Europe in any way capable of getting it together? What should we shoot for? And where do think we’re going to end?

Sander Tordoir (ST): Thanks, Cristina. And it’s great to be discussing with Oren. So maybe I start with some concerns that I actually share with Oren, and I think some Europeans certainly share. A major one is the US’s trade deficit with the rest of the world and the corresponding fiscal deficit that drives some of that. And the main counterpart on the flip side of that is actually China. No longer so much Europe and Japan. It’s really China. In relative terms, Oren is right to say Germany’s surplus is still quite sizable. But if you look at the global economy, China’s surplus really dwarfs everything else. And the US trade deficit is sort of the counterpart to that.

That fundamental imbalance at the heart of the global economy has two major risks. One is that China is using debt to ever expand its production capacity and the US is using debt to keep consumption up. And so there are real sustainability and even financial stability risks embedded in that dynamic.

And the second concern that I think is actually a shared one amongst the US and allies is the extensive pressure that China’s export-led growth model is putting on manufacturing in the entire G7. China now is 35 % of global manufacturing. Its consumption share in the global economy is a fraction of that. And in many key strategic sectors, China has market shares of 50 % or more, which raises a lot of security and geostrategic risks. I think that’s where we agree.

Where I would deviate from Oren is, take the example of pharma and tech. If it were true that the EU were discriminating heavily against American tech, I don’t see the result of it in the sense that American tech is extremely dominant in the European market.

Now if you think of Europe, the fundamental trade imbalance on the goods side is that Europe indeed has stronger manufacturing than the US, and the US runs a trade deficit in things like cars and chemicals and machinery. But if you look at services, digital services, but also financial services, the US runs a very large surplus with the EU of almost 200 billion last year. So there’s a kind of complementarity between the American and the European economies, but the European economy still has a stronger manufacturing sector than the US. Manufacturing is 16.5 % of EU GDP, it’s only 11 % in the US. But Europe is very dependent on American tech and financial services.

So there is complementarity. And in fact, if you look just at FDI across the Atlantic, it is in the trillions of dollars. It is huge, right? So the financial interwovenness is even far higher and it’s far, far higher than the FDI that the US and Europe, for example, put into China. So I think the tech story is more nuanced and I certainly don’t see any evidence that Big Tech was really hampered from conquering the European market by unfair barriers. Similarly on pharma. My friend and co-author Brad Setzer has extensively written about this. One of the major reasons that a lot of pharma trade from Europe goes to the US is actually because of tax incentives that Congress puts into place to offshore American pharmaceutical production and some of its phantom trade from Ireland because of tax distortion.

So there are real discussions we need to have between Europeans and Americans. It’s more nuanced. The big picture for me is really the one on China and the concern that I think is now growing that actually both Europe and the US are under pressure from China’s export-led growth model.

Now on your question of whether to retaliate, Cristina, I do think Europe should acknowledge some of the points that Oren was making and some shared concerns, but also strike back where things are unfair. And as I said, there are lots of interdependencies, so Europe could also stand up to Trump where things are unfair – it has a 19 billion dollar retaliation package on things like maize, motorcycles, clothing and trucks that they never deployed and Trump probably senses that was a weak spot. Plus of course Europe could also retaliate against American services exports to figure out how to reach a good negotiated bargain with this US Administration, but so far Europe has been quite cautious about doing that and is still trying to reach a negotiated settlement.

CC: So Europe could, but as of yet we don’t see any real evidence that it is happening. We will see how this unfolds. I will want to pick up the issue of tech in a bit because it is my pitch that these things all connect for Europeans who are concerned or who are interested in antitrust and regulatory enforcement in the tech sphere. The notion that this is somewhat detached should be over by now – these things are all very linked.

Now Oren, what is the impact of “America First”? It’s early days, but what can we see as yet in terms of impact domestically? The idea was that this would drive reshoring, would drive manufacturing activity back into the US. Of course, supply chains are not elastic to this extent and it takes time to rehouse a factory. So we are not going to expect to see that yet, but there was a sense that things were going to go out of shape when it came to inflation, we were going to see price increases, we were going to see a lot of disruption, perhaps empty shelves, we were going to see ships backing up at ports. That hasn’t really happened so far. And in fact, the American economy seems to be doing just fine. The labor market is holding well and is growing. So there is no real panic. But there is also now the additional concern around the Big Beautiful Bill, which comes on top of things and is objectively going to increase the deficit going forward. So what do you see? What is the sentiment around whether this strategy, aside from the headlines, is going to deliver in terms of its original objectives? Is it going to deliver? Is it capable of delivering? Do you see when are we going to start seeing it? I mean in terms of the original mission, which was ultimately do something that benefits the people.

OC:  First to pick up briefly on what Sander said. I would agree almost entirely with the points he made. And I think there’s a really important distinction here that’s important in understanding how the Trump Administration is approaching these issues, which is why I described those three categories of “dissatisfaction” in the U.S. –  market access outside of the US, surpluses being driven into the US, and with Europe really that third category of unfair treatment of tech companies, unfair approach to pharma pricing. It’s important to recognize that those aren’t conventional trade issues of market access, for instance. So Sander is absolutely right that American tech companies have had no trouble establishing a dominant presence in Europe. Again, from a perspective of balance of trade and financial flows, he’s absolutely right that the pharma statistics are to a large extent a function of tax treatment. And I think historically that would have been the end of the discussion, right? We look tariff levels, we look at the market access and we say, okay, fair’s fair.

But what the Trump administration has said is that’s not the end of the discussion. If you are giving tech companies access and they are dominant but you are taxing them in a punitive and extractive way, that’s every bit as much on the table as a tariff. If you are using drug price controls to essentially force the entire cost of drug development even for European drug companies onto the American market, that’s on the table too. And for that matter, if you are spending a very low share of your GDP on defense and expecting the U.S. to bear the burden of securing the world, that’s on the table too. So the refusal to see free trade as just this narrow standalone lane where you get tariffs right through the WTO, and now we can’t talk about it anymore, is central to what’s going on. What the administration is basically saying is, look, geoeconomics generally, tariffs are a tool of statecraft, they are going to be one of the ways that the U.S. exerts its power and leverage and tries to address a whole host of issues, tries to address immigration policy for that matter. And so I again, I would completely agree with Sander as a matter of formal trade policy analysis, but would suggest that’s not how the U.S. I think is looking at it right now. And I think we’re right to look at it differently.

With respect to the domestic situation and the Big Beautiful Bill, that is definitely a piece of this because I completely agree that our fiscal deficits are part of the problem here. The fact that the U S has complaints elsewhere doesn’t mean that we don’t have plenty of problems ourselves. And it’s quite unclear how we think we could possibly address our trade deficit if we’re continuing to drive up our fiscal deficit this way. That’s certainly something we’ve been focused on very heavily at American Compass and is going to have to become central to the conversation over the next few years.

But in the short run, as you said, frankly everybody – even the proponents of this strategy –  are surprised by how little cost has shown up so far. Everything from the concern that if you do tariffs, the dollar is going to rise and that’s going to offset the effect of the tariffs – that didn’t happen, the dollar has been declining in a sense, compounding the effect of the tariffs. That you’re going to see consumer prices skyrocket. You’re going to see inflation rise.

It has not happened. And that’s for a variety of reasons, which I think are still not entirely understood. You’re going to see markets tank, has not happened, markets are up. You’re going to see supply chain seize up, has not happened.

And so I think to a significant extent that has really strengthened the American hand here and given the Administration a lot more room now as we hit these July or August 1st deadline to say yeah we are going to come back with more of these tariffs because again as “best alternative to a negotiated agreement approach” it turns out that these tariffs really do get other people’s attention awfully effectively and thus far they are not imposing the downsides that folks expected.

But I do think some of that is still going to show up. It’s very important not to look at the data from the first few months and say, well, you know, there you go, tariffs are free –  because that can’t be true. And in a sense, you wouldn’t want it to be true for tariffs to promote reshoring. You need those cost differentials, among other things, those price differentials.

But to your point that these things take time. What should we be looking for? The big initial question is capital investment, do we start to see in the GDP figures increased levels of real capital investment in the private sector generally, in manufacturing structures in particular? We’re seeing it anecdotally. We’re seeing TSMC just announced on top of the 165 billion plus they committed that they’re now bringing advanced packaging into the U.S., they’re actually shifting investment out of Japan and into the U.S. in response to the tariffs. We’ve seen that from some of the auto companies. But of course, you also see anecdotes of places where tariff-related disruptions might slow investment. So for the next year or so, the question is going to be what is going on with capital investment. If it’s going up, people are rightly going to say this is working. If it going down, people are rightly going to start to question at a minimum what else is needed to make reshoring and reindustrialization happen.

CC: Clearly a lot of the drive towards “America First” was very much motivated by concerns about the pressure that China was exerting on the US. Europe was in a somewhat different position because it hadn’t really yet come to grips with the significance of the pressure from China.  Sander, you have written quite a bit about how ultimately Europe was going to align more with the US position on China once Germany got kicked out of China and the Second China Shock really started hammering European manufacturing. But now with this looming quasi trade war between Europe and the US, is the notion that Europe should cozy up to on China still in play? Where do we stand?

ST:  If you look at the global economy since the pandemic began, it’s fairly clear what happened. One of the major changes apart from the pandemic shock, was that China’s real estate fuelled growth, which was absorbing all of China’s excess savings. It’s a very high savings, very low consumption country. So there has to be a lot of investment somewhere, and for a long time it was real estate. That ended, that bubble fully collapsed in around the time of the pandemic. And after that, a very deliberate choice by Xi Jinping and the Chinese leadership was to plow all those excess savings into expanding manufacturing capacity in their priority sectors, which by and large overlap with the backbone of Germany’s economy and actually the wider central European economy. So cars, machines, increasingly planes. And so it’s very clear in the data what happened. If you look at the last four years, China’s export volume growth is up 40%. Its industrial production is up 30%. And Euro area exports and industrial production are down, actually nominally down. The US is roughly flat. So everybody else is losing space to China across the globe. And that’s the major development.

Europe does have a trade surplus and is dependent upon external demand to a degree, but it’s less that we try to take advantage of everybody and more a product of the way in which Europe handled the euro crisis, which was to apply internal devaluation. But in any case, that surplus has increasingly ended up in the US. So China’s surplus is ending up all across the world and increasingly in Europe, and Europe’s surplus is increasingly in the US. And in fact, the US overtook China as Germany’s most important trading partner a year and a half ago, reflecting this shift in the global economy. Now, does that mean that for all the tensions that we have and the disagreements that Oren and I might have, China is the better partner for Europe? It is obviously not. Both are trade surplus blocks. Both need buyers, not sellers, which I think Europe is increasingly doing and which I very much was a proponent of.  We need internal demand, right? So that’s the fundamental question that Europe is facing.

It is not clear to me what the proponents of “let’s cozy up to China because the US is being ugly to us” are getting to. It’s not clear to me what those proponents believe we can achieve with relying more on China. China is very good at providing lots of cheap supply of products that is anyway going to happen. And that is going to happen all the more as Chinese products bounce off the US tariff wall.  So if you’re looking for something that China can offer, I would imagine that what the Europeans would ask is not that dissimilar from what, for example, the Biden team asked China or even previous US Administrations asked China, which is raise consumption in China, balance your economy a little bit, be less extremely dependent on export-led growth. And as long as China is not doing that as a domestic political choice, I don’t really see how the cozying up works. Europe is really stuck in some ways between the Chinese hammer and the US anvil of higher tariffs and it will need to figure out what it wants to do and if it wants to do some of the things that you and I have discussed in the past, Cristina, which implement the Draghi report, the comprehensive reform, a different set of macroeconomic policies and try to find a way to settle these differences with the US, which in my view for all of our differences would still be the more logical partner given the complementarities between the American and the European economy.

Now one of the criticisms that I have of the Trump Administration’s approach to tariffs, also vis-a-vis the Biden administration is that they’re used as a Swiss knife. They’re used as a tool of economic coercion. They’re used as a reshoring instrument. They’re used as a revenue raising instrument for the government. I’m skeptical that one tool can serve so many purposes at the same time. I also wonder if tariffing everything and all countries at once from Nike shoes to strategic machinery is really going to set the right price incentives if on-shoring is what you actually care about. If you care about revenue maximization, then maybe yes. But it’s not plausible to me that the U.S. will start producing Nike shoes again at home. I would argue it certainly doesn’t have to. And so I’m just curious how you see this fitting into the China strategy. What is really the China strategy? The Biden Administration went for sectoral tariffs, for sectoral industrial policy in cleantech and chips. The Trump Administration seems to continue to want some chips, not so much on the cleantech side. And the Biden Administration tried to work with allies to do reshoring and still have market scale across allies to stand up to China. The Trump Administration seems more of an “America alone” approach. I’m concerned it will fail on its own terms. I’m curious what you think. What do you as conservatives really want with China? And do you think this is the right strategy?

OC: I think when it comes to China, admittedly, there’s a lot of active debate still within the US, even within the conservative side, even within the Trump Administration on what the end game should actually be.

My own view, again ultimately as a descriptive matter, regardless of what one might like in an ideal world, is that the US and China are going to have to decouple. And I don’t mean in the narrow strategic decoupling, the “small yard high fence” of the Biden Administration. I mean much closer to US-Soviet Union Cold War-style decoupling. I don’t think it’s actually

plausible to have economic integration between economic and political systems as different as the American and Chinese ones, when they are sort of peer adversaries. That has never happened anywhere in human history. It did not happen during the Cold War. The only reason we attempted it in the post-Cold War period is because we believed that China was going to liberalize and democratize. And if you could go back to the late 1990s, and told people what China was going to look like in 2025, the idea that, well, of course we should have free trade with China would have been ludicrous, right? Milton Friedman and Friedrich Hayek never argued for free trade with the Soviet Union. That’s just not what free trade ever meant. So we could spend an hour on all the reasons I think that incompatibility is irreconcilable. But if you believe that that’s the case, then the question is OK, how do you disentangle these things?

Step one is obviously the direct relationship. And this is where you see higher tariffs on an increasing number of products. I’d say that, in effect, we have ended permanent normal trade relations. We haven’t repealed the legislation, but we have certainly created more uncertainty for anybody trying to do business in China than existed even before China was admitted to the WTO. You’re seeing increasing efforts to cut off investment flows in both directions, to cut off technology transfers and so forth. I think that will continue and I think that’s good. I think it needs to continue.

The second problem that folks had not really tackled until the Trump Administration is that in this global economy, and for a lot of reasons you were just describing, the US can’t do this on a bilateral basis. One thing we were already seeing in that post-COVID period you were describing is out of nowhere essentially a massive trade deficit emerging between the US and Mexico – that’s because you had in part Chinese investment building up so quickly in Mexico. And so we have the transshipment problem, the direct Chinese investment into countries that then sell into the US.

The other problem you have is that US exporters can’t succeed in third markets if they’re being asked to still compete against China. So if the US actually wants to get the benefit of a good trading relationship with Europe, it can’t keep China out of its market to the benefit of the Europeans, but then turn around and try to do business in the European market and discover, well, forget it, you’re never going to sell a car here because BYD is being welcomed through  the door from the other side.

Following the logic forward, if the U.S. and China are going to decouple, you really have to have a decoupling of spheres. If you still want to have free trade, and I certainly do, conservatives do generally, the Trump Administration does, if you want to have a sphere of free trade among market democracies, that is going to have to be a set of market democracies that holds hands on a common approach to China.  And up until Trump, we did not see that quite obviously. I mean, the European posture, as you were also describing, was well, let’s see if we can have it both ways. We’re having huge problems within USMCA, with Mexico in particular. We are continuing to see big problems with Japan’s posture towards China. So I think what you’re seeing on that front, and it has been central to a lot of these country-by-country negotiations, is not only “okay, we need to address our bilateral imbalances”, but also “we need to address how you’re going to treat China because either you’re with us on China inside some broader tariff fence, or you’re not. And if you want to go to China’s side, that’s your prerogative. But then we’re going to have to treat you more like part of the Chinese sphere. And so I think you see that that is what’s happening”.

And the last thing I want to just pick up on here is exactly the point you were just making, which is that at the end of the day, this isn’t a close question for a market democracy. If you could have the old world of the US just having an open market, that would be nice. If that’s not on the table and the choice is genuinely you turn your back on China and come into the US sphere, or you turn your back on the US and go into the Chinese sphere, this is not a hard question for the EU, for Japan, for Korea, for India, for any country that wants to have a market democracy of its own. And the key is to recognize that the US isn’t demanding an exploitive relationship. The US isn’t demanding the kinds of things that China would demand. The US is essentially demanding behavior similar to the US’s own behavior. The US doesn’t want to shift to export-led growth and dominate foreign markets. It wants balanced trade. The US isn’t asking everybody else to pay for American defense. The US is asking for everyone to pay their own share of the defense. The US isn’t asking for everybody else to keep China out while the US plays both sides. The US is asking for everybody else to hold hands with it on confronting China. And frankly, that’s a fair deal, even if it’s not as nice a deal as people may have been used to in the past.

ST: Can I quickly follow up Cristina? So there’s a grand strategy towards decoupling then if I understood you correctly, which is going to take time. And all these pieces are moving in that direction in part, in addition to the other objectives that I see at least key Trump officials mentioning. I guess I would just have two quick challenges and want to get your view on that.

The first is I also hear President Trump talking about a trade deal with China where the US would export more commodities and agricultural products in exchange for a detente in the bilateral trade war. That to me seems antithetical in every possible way to the philosophy that you’re describing. My second challenge is if this is the strategy, then why isn’t the US actually moving in the direction of allies that move in its direction. On defence spending, Europe is massively moving at this stage. Everything above 1 % of GDP in Germany defence spending is exempted fully from its fiscal rules. That is a very strong incentive. The German government just announced that they’re going to be buying thousands of armored vehicles and tanks.

So a lot of the things that I think you’re laying out are actually being done. And yet, President Trump says he’s going to put very high tariffs on the EU after all. My concern is that if that’s what the US wants, the very haphazard, chaotic strategy of negotiation is actually driving allies away rather than towards this kind of negotiated settlement. So I’m skeptical that decoupling is possible to the extent that you’re describing. I’m curious what you think of these two challenges that to me seem to run in the face of what you’re describing as the long-term goal.

OC: Frankly, I agree with both of those. I think on the first point, I mentioned there’s a lot of disagreement on this decoupling point, including in the Administration, including as you said with Trump’s own posture. There are times when it seems clear he is pushing forward aggressively with decoupling, and there are times when it seems clear he is actively pursuing a deal. He’s, for that matter, on the record a couple of times now saying he wants BYD opening factories in the US, which I think is completely implausible and obviously counter to the sort of strategy I’m describing.

What I’m doing is not speaking for the Administration. I’m describing what I think would be the best, as a strategy for the United States and a way to understand why you’re seeing a lot of these kinds of shifts and why ultimately they could make sense. But I completely agree there’s not the clarity and consistency there that we ultimately need, both for our own sake and certainly if we’re going to be making demands of other countries as well.

On what Europe is doing, I would say I have less sympathy because it’s important to say that Europe is only doing this now after the Trump Administration started treating it this way. The German government just acknowledged that the German army is smaller and less prepared now than on the day that Russia invaded Ukraine three years ago. And so I think there’s a reality where Europe may have made nice noises for going on a decade now, but Europe has not been serious. And I compare this to, I admit this is not kind but it’s appropriate, Europe has behaved like the sort of adult child living in the basement playing video games all day, and has been doing so for a couple of decades when it comes to defence  Frankly, the US has tried everything and none of it worked. And you can offer the kid to help write their resume. You can set up job interviews. And at some point, if the kid just says, thanks, I’m gonna sit here and play video games, all that’s left is to throw them out of the house. And the moment you’re throwing them out of the house, everyone’s like, well, why are you throwing them out of the house? How’s that going to help? Whatever.

At some point you got to throw them out of it to the house and hope they land on their feet. So I am very pleased to see the sorts of commitments that European countries are starting to make now at the most recent NATO summit. At the same time, I don’t think the way this works is that Europe can behave the way that it has for the past few decades. And then I finally say, OK, look, we promised to do something. And like, that’s it. Congratulations, you’ve succeeded. Europe has a long way to go before it can genuinely claim to have earned back any trust on some of these issues.

CC: So let’s stay with that analogy. All of us in Europe had something of a Sputnik moment about the man-child being thrown out of the house at the time when President Zelensky was meeting with President Trump and the Administration. That was the moment at the end of February when Europe understood it was being thrown out of the house because it wasn’t just that President Zelensky was being dealt with the way he was, but it was a broader sort of sense that Europe got, that we need to get going, are on our own. And this is something others in the US have confirmed to me – subsequent to that event, I remember saying, wow, we in Europe are quite perturbed about that, and the answer from the US was grow up, we are tired of coming to sort you out and you need to do your own stuff.

So that takes me back to Europe and the next topic as we are progressing towards the end.  Sander also talked about the Draghi report, there has been a number of signals in Europe even before this defenestration or kicking out of the house which told us very clearly we need to just get that act together. The Draghi report landed with a thud on the desks of everybody in September and told us in fact what we already knew (because what Mario Draghi told us in September is something that Mario Monti had told us 10 years ago, only he told us then we are getting into an existential crisis and now Mario Draghi saying we are at the existential crisis point).  Sander, you’ve written a lot about what we should do to try and act along the recommendation of Draghi, which have to do with sectors like defense, critical sectors like green tech. It’s not a secret that Draghi is quite frustrated himself with the progress made in the last nine months since his report was produced. And I think there is a sentiment in Europe that we are not making great progress, but perhaps I’m being unfair. Where do you stand on that?

ST: I’ll come back to the teenager playing games in the basement in a second. On Draghi, his sombre diagnosis, which you and I largely share, Cristina, and many experts and analysts too, is that our productivity growth has been quite sluggish. There isn’t so much business dynamism as we would like. We’ve discussed the global economic challenges that are hitting the European economy, which is far more trade dependent than the US and this is potentially a bigger risk for Europeans. And we’ve talked about manufacturing. One of the great strengths of the Draghi report is that it doesn’t do the trope that you often have in European debates – if only we would do software and tech and be more like the US, everything would be honky-dory. The suggestion we should basically abandon manufacturing in pursuit of high-level services. Draghi rejects that. He says you need both.

And I think that’s exactly right. Because if you look at productivity growth in the European economy since 2000, not the best productivity growth, but there has been some productivity growth. The two sectors driving that are ICT and manufacturing. And so if you switch to a services-based economy, you bear real costs and the US is struggling with that. We have 30 million manufacturing jobs in Europe, the US just 13 million and while US tech is highly profitable the industry employs very few people. Nvidia, the most valuable company in the world, employs 30,000 people, which is a staggeringly low number. I don’t think in previous industrial revolutions the leading company ever employed that few people.

So yes, Europe needs to catch up with advanced technology, but it has a strong manufacturing base, much stronger than the US, that we need to defend. And that’s basically what Draghi is saying. And if you just think of it as a sort of three-way scorecard: one set of recommendations is on the macroeconomic front. And I think Europe is actually moving there. A lot more spending from the low debt countries, from Germany to Scandinavia, possibly the Netherlands after the election in October. So there is stoking of internal demand, partly for investment, partly for clean tech, partly for defence. At least there’s some movement there.

The other two dimensions are industrial policy and trade policy to defend this manufacturing base. The jury here is very much out, a very live debate. The Commission has put a few proposals on the table. Many member states are soul-searching on how they can build on the strength of an Airbus or clean tech manufacturing, which Europe is far better at than the US, but there is the China challenge. All those debates will need to settle. And then finally, more in your field Cristina, is the digital economy and AI. And there, one of the big challenges is that the European single market is very fragmented, which makes it very hard for digital innovative companies to scale within Europe in addition to other challenges. You’ve mentioned this too – the IMF calculated the tariff-equivalence of barriers within Europe is over 100 % for services trade. That really slows down growth. And one of the things you can do as Europeans (that John Springford and I wrote about) is invest in your cities, in your second-tier cities that are actually already doing really well in services trade within Europe, in tech, in software, in finance, and to avoid the kind of New Yorkification or Londonification where all of your economic activity centers in one hub.

On the macro front things are moving a bit on industrial policy. There’s a very heated debate on the single market, really the most difficult reforms. I think I’m not very optimistic, but I hope that the Europeans will move.

Now coming back to the teenager playing in the basement. So my contrarian response to Oren is my hunch is that the tariff strategy of the Trump Administration is too haphazard and all over the place. And I think it would be more effective if you picked strategic sectors. In a future where the US wants a US-centric and a China-centric world, the US will still have to rely on European manufactured goods to a considerable degree because the remanufacturing push will not be as successful. Conversely, I fear (but Cristina, please disagree with me) I fear that the Europeans will still be quite reliant on American software and technology.

So we’re not going to be able to whisk away this complementarity. And the kid might come out of the basement and have actually something to offer that the US will still want in a few years. That’s my sketch of the future.

OC: I think it’s certainly fair and correct that a good future trading relationship between the US and Europe could still see, for instance, some higher level of manufacturing in Europe and some higher level of tech and finance in the US. If that’s happening within a context where the US and Europe have agreed together and ideally with the rest of North America, ideally with Japan and India, the other Anglosphere countries, that they are going to maintain much more balanced trade within a system that keeps China out.

That would be entirely satisfactory to the US. For the US the one nice thing about having a trillion plus dollar trade deficit even accounting for services is that we have an awful lot of opportunity to expand manufacturing, rebuild capacity just to serve that domestic market. And my view is that much broader tariffs rather than strategic sectoral ones is actually the right approach. Where we’ve seen people advocate for narrow sectorally targeted tariffs on key products is based on the argument “you don’t want to be tariffing intermediate inputs, that just makes your producers less competitive”. All of that comes from within a frame that assumes that you basically already have balanced trade and are trying to drive export led growth. If you’re an East Asian type in the 1970s, all of that is obviously true.

If you’re the United States, what you’re trying to do is reshore manufacturing broadly. You’re trying to actually rebuild an industrial base. And does that mean advanced semiconductors? Absolutely. It also means basic metals and chemicals. The Nike shoe example is a very interesting one. I don’t know if Nike shoes are one of the things that would make sense to manufacture in the US. I do know that textiles broadly is something with very leading edge components, potentially very highly automated capital intensive applications, that you would have in a healthy industrial base. So I think it’s important to understand what the US is trying to do is not rebuild some set of kind of national champions for export. It is trying to actually rebuild its industrial base. And that means bringing back manufacturing on a much broader basis, bringing back the supply chains associated with particular key technologies. And so I think the much broader set of tariffs makes sense.

And the last thing I would emphasize is that there’s also just the political economy element of it, which is that if you are asking particularly a political system like the American one, to make this kind of shift, it is not going to effectively make it industry by industry, product by product. We have done this and we did it successfully, I would argue, with semiconductors with the CHIPS Act. But that was a five-year long process that is still working itself out to generate investment in a few particularly important factories. We can’t be doing that every time. At some point, the blunter instrument, while it has its own inefficiencies, is far preferable to the attempted but not very well done targeted approach.

CC: So as we move towards the end, I love this discussion and we could be continuing for hours, but it wouldn’t be right of me if I did not pick up on the digital enforcement piece. You talk about the broad context in which it is not in your view reasonable or particularly desirable to take a sectoral approach and so everything needs in some way to be seen as a broader conversation. That is an area Europeans are finding particularly unpalatable. I go back to the beginning when you characterized the position in digital as one where Europe is being discriminating and unfair against Big Tech companies.  And that is something which for Europeans is very hard to really accept. We have large American companies in tech that are occupying our markets and whose conduct is pretty self-evidently problematic in some dimensions. And this is not just us because not only did the Biden Administration pursue these companies through antitrust enforcement, but even the current Administration is pursuing and continuing to pursue these cases of anticompetitive conduct. And indeed some had been started under Trump One.

So the connotation that we are somehow being unfair and discriminatory vis-a-vis the digital American companies is particularly difficult for Europeans to accept because our answer is simply no, we are saying that they are behaving badly and we have to do something about it just as you are trying to do. The reality though, is that at this point while in Europe we are continuing to tell each other that we are continuing to enforce against these digital giants, as you say, everything is in play. And what matters more to Europeans, ultimately at 25 % tariff on cars or going slow on digital enforcement? This is the sense in which things will end up being bound together and digital regulation is in a death spiral. But we don’t accept the premise somehow we are being unfair or discriminatory. It’s just that now there is an element of coercion because we are put in a position where we have to choose: do we want to negotiate a deal which is very punitive in sectors that matter a lot to us, or do we want to continue to be be virtuous and enforce against companies we believe are behaving in anti-competitively. Do you not see, Oren, how this is really very much the sentiment here? We are not really being unfair. That is what these companies are saying, of course, but we are not being unfair. It’s just happening that they are American companies, and we are pursuing them in the same way as you do. What’s your take on that?

OC: I guess this strikes me as a quintessential illustration of why the old free trade regime where we were just going to have a WTO that agreed on tariff rates and then everything else would be fine just doesn’t work anymore because I think it’s entirely legitimate for European countries to say we have issues with the way these tech companies are behaving. And as you said, in the U.S. we have issues with the way these big tech companies are behaving. Where I see problems is in particular where you get into some of the fines and so forth that strike me as to a significant extent extractive. That is, you have a set of regulators who don’t have any concern for the actual well-being of the firms and so it’s just a question of well, what can we collect from them?

And again, under the WTO system, that’s almost what you should do. But it’s also important to underscore why from an American perspective, we look at that and say, that just seems like you’re kind of taking a pound of flesh, that is a problem. The right path forward is to actually have this in the conversation.  The digital services tax is a good example, which needs to be part of the structure that trading partners agree on for how we’re going to handle this sort of thing. But the U.S. is at this point going to assert what it sees as its interests in that matter. And it is no longer going to be the case that it is up to everybody else to just decide “here’s what we can extract out of the deal” as at the end of the day it is these American companies that seem to be doing all of the innovation. That’s where actually just the comparison to the pharma context is so interesting:  because while the financial flows looks different, it is another example where we just have an economic system today (or we have had one) where it seems like the European model assumes it can just claim whichever benefits it wants and not really participate in paying the costs. And I don’t think that’s sustainable any longer.

CC: There is a focus on extraction, and it sounds as if what we doing is extracting hundreds of billions from these companies. The reality is these fines are trivial. Five billion, six billion,

which sit in an escrow account for years until the end of the legal process is ultimately reached, nothing really gets paid truly out till then. So the reality is much more that tech companies are using this notion of “extraction” to just push back on regulation but extraction isn’t really what annoys them. What annoys them is the interference

with product design, with commercial strategies, which is in some way completely understandable. But again, as a way of describing the situation it is something we don’t recognize. The fines are fairly trivial in the scheme of things.

CC:  So where we are with all this uncertainty, what is your sense for where things might stand in terms of the transatlantic relationship, the global trade order in five years. This I realize is pretty unfair, but you might as well speculate.

OC: Sander to your point about the child in the basement having some strength of his own. I think that’s what the United States wants. I’ve been trying to emphasize in a lot of my writing recently that a huge piece of the premise of “America First”, is not “America First and also still the global hegemon”. It is a recognition that the US should have reduced obligations. And with that comes a reduced right to dictate things. And so a much stronger European defense sector that is actively putting America’s bloated and inefficient defense contractors to the test and actually rearming Europe and also creating demand for American products, ideally helping support American defense in various ways. I think that is the ideal.

And if we were to forecast what is the best we could hope for, it is exactly that, that the US and its allies reach a new settlement essentially where there is an alignment of interests, there is mutually beneficial trade, there is sharing of defense and security commitments in various ways, but that really these various regions are much more able to stand on their own. And I think that’s something that would ultimately be beneficial to those regions and allies and to the US as well. So that’s exactly what I hope for.

I think that the downside risk I remain very concerned about with Europe in particular is for reasons of internal political dysfunction I don’t know if Europe’s going to get there. I think it is a lot easier to see how the other parties that the US is negotiating with can get to a solid agreement. I don’t know if Europe does. And so if I were to guess who is going to be the outlier who’s hanging out there in a few years and maybe struggling to find a path forward, Europe would be first on my list. That is the concern I have. And that would be unfortunate for the US as well. And so I hope it’s something that US policymakers take into account in recognizing that there’s a better world out there that serves both sides better than what we have today and where we could land if things don’t go well.

CC: Not a very encouraging note to end on, but it’s consistent with a view I’ve heard also from others in the US. The view that Europe could get it together is really not there. And Europe is just going to lose ground. Sander, how do you feel about that?

ST:  Oren and I disagree on quite a few issues and tactics, but I think we share some hopes for the future. It’s possible that Europe’s political internal dysfunction will trump everything else, but I also note that there is a lot of political dysfunction and polarization in the US. So it’s not ex ante clear to me that Europe is so far worse off there. It’s also not actually that clear to me that non-EU countries that are negotiating with the US are making much better progress on the trade front with the Trump Administration – from Japan to Korea to the Vietnam deal, which seems to be on loose screws again. But perhaps you’ll be proven right down the line.

My hope, Cristina, is still that the Draghi report really provides that blueprint. It still is very much a powerful blueprint to shape the debate. And that tells you that there is some reform momentum in Europe that is alive. And I hope that the Europeans will seize on it.

CC: As per the title of this podcast, Will Europe Make It? We very much hope and wish so. Let me wrap up. We’ve been here longer than we had planned, but this discussion has been fascinating. And as a final note from me, what this discussion really is highlighted a point I keep making – that for anyone coming like me from the antitrust world, it is simply not possible to remain in that silo and not lift yourself up to understand how all of this connects – because the discussions we’re having in the narrow silo of antitrust and enforcement on digital companies, for example, are absolutely bound to this broader context. Thank you both for doing this with me.

OC: This was great, thank you.

ST: Thanks so much.