In this episode Dominic Bowen and Professor Kimberly Clausing examine the return of tariffs to the centre of U.S. economic strategy and the risks this shift creates for the global economy. Find out more about how protectionism and populism are reshaping U.S. trade policy, why tariffs act as a hidden tax on consumers and small businesses, the political dynamics driving short-term wins over long-term stability, the impact on supply chains and export industries such as higher education, tourism, and technology, the risks of corruption and rent-seeking in tariff exemptions, and how international trust in the United States is being tested as allies confront unpredictable economic behaviour, and more.

Professor Kimberly Clausing holds the Eric M. Zolt Chair in Tax Law and Policy at the UCLA School of Law. Professor Clausing is also a nonresident senior fellow at the Peterson Institute for International Economics, a member of the Council on Foreign Relations, and a research associate at the National Bureau of Economic Research. During the first part of the Biden Administration, Clausing was the Deputy Assistant Secretary for Tax Analysis in the US Department of the Treasury, serving as the lead economist in the Office of Tax Policy. Professor Clausing has published widely on taxation, climate policy, and international trade, and is the author of Open: The Progressive Case for Free Trade, Immigration, and Global Capital (Harvard University Press, 2019). International Monetary Fund, the Hamilton Project, the Brookings Institution, the Tax Policy Center, and the Center for American Progress and has testified before the U.S. Congress on multiple occasions. She has received two Fulbright Research Awards, and her research has been supported by the National Science Foundation, the Smith Richardson Foundation, the International Centre for Tax and Development, the U.S. Bureau of Economic Analysis, and the Washington Center for Equitable Growth.

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Transcript

[00:00:00] Kimberly Clausing:
Are people endorsing tariffs? I don’t think so. I think they were expressing dissatisfaction. And the ironic thing is that tariffs are going to lead to exactly the kind of price increases that they were protesting by electing Trump.

[00:00:13] Narration:
Welcome back to The International Risk Podcast, where we discuss the latest world news and significant events that impact businesses and organisations worldwide.

[00:00:21] Dominic Bowen:
Hi, I’m Dominic Bowen, and welcome to The International Risk Podcast, where we explore the risks shaping our world and the decisions confronting politicians, business leaders, and senior advisors.

Today we are turning to a topic that has returned to the centre of global strategy: tariffs, from Washington to Brussels. Tariffs have moved from the footnotes of trade policy to the front lines of political strategy. Our guest today is Professor Kimberley Clausing, one of the world’s leading voices on that shift. She has contributed influential work at the Peterson Institute for International Economics, worked inside the U.S. Treasury, and is currently a professor at UCLA.

I have been participating in conversations across European boardrooms where tariffs are not just abstract policy but levers of power, shaping investment and supply chain decisions, and redrawing the competitive map. This is an important conversation. Today we are not just going to ask who pays for protection, but what it really means and what we are trying to protect.

Professor Clausing, welcome to The International Risk Podcast.

[00:01:31] Kimberly Clausing:
Thank you so much. It is great to be here.

[00:01:33] Dominic Bowen:
When I speak with senior business leaders across Europe, I hear them debating whether tariffs are a short-term political play or whether they mark a structural shift that companies must consider in their long-term strategies. Based on what you are seeing in the U.S. and globally, do you think tariffs are now a permanent feature of the competitive landscape? And what dangerous assumptions might companies and politicians be making?

[00:02:01] Kimberly Clausing:
We need to distinguish the United States from the rest of the world, and also distinguish the Trump administration from other periods.

Globally, tariffs are not the policy choice of most major governments. Other countries are reluctantly negotiating with the Trump administration over tariffs, sometimes retaliating, but not replicating the U.S. approach. That has been helpful for the world economy.

In the United States, however, the Trump administrations have very much embraced tariffs. They dramatically increased their use during Trump’s first term, and even more so now. I would expect them to continue using tariffs, although some are under legal challenge, so the courts may have a role to play.

Whether tariffs will be a lasting feature of U.S. economic policy depends partly on how the economy evolves over the next year. My own forecast is that we are going to learn a very tough economics lesson and that tariffs will become discredited. That may be more my hope than my prediction, but we will see.

[00:03:20] Dominic Bowen:
That is interesting. If we look at the first two quarters of this year, a lot of companies brought forward imports, which had knock-on effects on GDP figures. It would be easy to blame or credit Donald Trump alone, since he has consistently advocated tariffs since the 1980s. But is this shift entirely down to one man, or is there something broader at work?

[00:03:45] Kimberly Clausing:
Trump has surrounded himself with advisors who share his views, but it is difficult to find much support for this approach within the economics profession, which has largely rejected it.

There is, however, a global move towards populism. In the U.S., populism has taken the form of tariffs. Polling suggests people are not enamoured with tariffs themselves. They want policies that respond to their concerns as middle-class consumers, taxpayers, and workers. There are many ways to do that — investment in infrastructure, education, or community colleges, for example — that would be far more productive.

The problem with tariffs is that they ultimately harm the very people they are intended to help. They create havoc for the U.S. economy and economies around the world, while failing to provide meaningful relief.

[00:04:54] Dominic Bowen:
We often say that democracy is the best of a bad bunch of political systems. You mentioned the move towards populism, which we see not only in North America but across Europe and beyond. For the past two decades, democracy has been in decline globally, with many countries drifting towards authoritarianism.

I lived in Iraq in 2008 and 2009, and I was struck by how many educated Iraqis told me they wished Saddam Hussein was still in power. The first time I heard it, I was shocked. But over time I understood: under Saddam, if you avoided politics, you had stability. Now people were missing, the economy was collapsing, and violence was everywhere. You could disagree with their nostalgia, but the logic was clear.

Of course, the U.S. is far from that. You served in the Biden administration after Trump’s first term. The political pendulum in the U.S. has been swinging dramatically over the past sixteen years. What does this mean for economic policy, and how should business leaders interpret U.S. policy when the pendulum moves from Trump to Biden and back again?

[00:06:53] Kimberly Clausing:
There are two parts to this. First, democracy versus authoritarianism. In poorer countries, people may be willing to trade some freedoms for stability, but if you look globally, the most prosperous countries with the highest living standards are almost entirely democracies. Turning away from democratic institutions in wealthy nations would mean abandoning what has been a successful model.

Second, tariffs. Few rich countries use tariffs as a fiscal tool because they are distortionary. They encourage countries to specialise in industries they are not efficient at producing, which makes no sense. In poorer countries, tariffs sometimes exist because tax capacity is limited. But in wealthy countries, tariffs have been discredited for good reason.

As for the Trump–Biden pendulum, Americans voted for Trump in part out of frustration with inflation during the Biden years. Rising healthcare, housing, and education costs left people insecure. Replacing the incumbent seemed logical to many voters.

But I would not exaggerate the magnitude of this shift. Trump’s popular vote margin was smaller than Hillary Clinton’s in 2016. This was not an overwhelming endorsement of tariffs. In fact, many voters did not connect Trump’s proposals with the inevitable price increases. When they do, the political system will face inevitable disappointment.

[00:10:26] Dominic Bowen:
Thank you for unpacking that. Tariffs are a distortionary tax. Anyone who studied comparative advantage knows countries benefit by specialising in what they produce efficiently and trading for the rest. Globalisation has provided advantages for many.

You mentioned inflation hurting Americans, with some estimates putting the cost of tariffs at $2,500 to $3,800 per household. Who actually benefits from expanded tariffs? Where does the Trump administration believe the advantage lies?

[00:11:15] Kimberly Clausing:
Supporters claim tariffs are worth paying because they will spark a manufacturing renaissance, creating jobs in areas hit hardest by deindustrialisation. Unfortunately, that story is misguided.

More than half of U.S. imports are intermediate goods used by businesses to make final products. By taxing those inputs, tariffs raise costs for businesses, forcing some to consider bankruptcy. If you are making cutlery, for example, and your steel costs rise because of tariffs, you cannot compete with foreign producers who buy steel at world prices. Entire industries risk contraction.

We saw this during Trump’s first term: tariffs reduced jobs overall, as retaliation, supply chain disruption, and competitiveness losses outweighed any gains. Protected steel workers might feel immediate benefits, but the wider economy suffers.

[00:14:15] Dominic Bowen:
So are there any winners at all?

[00:14:21] Kimberly Clausing:
The government gains some revenue, but it is more distortionary than other taxes. Often that revenue was spent compensating farmers for lost export markets. In the current administration, Congress has even proposed rebating it back, which cancels out the gain.

There is also a more concerning dimension: corruption. Because these tariffs are imposed by executive fiat rather than congressional legislation, they allow for arbitrary exemptions. This creates opportunities for rent-seeking and side deals. One striking example was Apple’s CEO presenting the President with a gold gift after receiving tariff exemptions. Small businesses, lacking such access, struggle while well-connected firms secure favours.

[00:16:08] Dominic Bowen:
You have touched on corruption. There are concerns about both parties, but Trump’s approach seems unusually blatant. Will this damage the U.S.’s ability to negotiate with global partners in the long term?

[00:17:05] Kimberly Clausing:
The corruption here is on another level. While stock trading in Congress should also be addressed, tariffs administered by executive discretion create unparalleled risks.

Beyond that, U.S. credibility has been harmed. We have imposed tariffs on close allies like Korea, Japan, Canada, Mexico, and European partners — countries that have fought alongside the United States and shared long-standing alliances. At the same time, we have abandoned agreements such as the Paris Climate Accord and undermined commitments in public health and foreign aid.

The rest of the world will inevitably see the U.S. as less reliable. The re-election of Trump compounds this. Allies could dismiss his first term as an aberration, but a second confirms a pattern. And this term is moving faster and with greater recklessness than the first. It will be a deep hole for future administrations to climb out of.

[00:21:00] Dominic Bowen:
I cannot tell you how many CEOs asked me in the final quarter of last year who was going to win the U.S. election and what that would mean. My first answer was always that Trump had four years out of office to prepare, and organisations like the Heritage Foundation had been planning extensively. In effect, he had eight years in office plus four years of preparation.

My second prediction was that his second term would be more significant and more organised than the first, and that he would be elected again because of the economy. To quote Arnold Schwarzenegger, “It’s the economy, stupid.” Trump focused relentlessly on economic talking points. Even if his policies were unsound, they resonated.

Analysts are already predicting significant knock-on effects. The World Travel and Tourism Council estimates the U.S. could lose $12.5 billion in tourism spending. Forbes reports international travel to the U.S. is down 20 percent. That is 200,000 jobs at risk. So while tariffs may raise revenue, they cost far more in other industries.

When we see tariffs impacting supply chains and different sectors, which industries concern you the most? Where should business leaders be looking?

[00:22:38] Kimberly Clausing:
I worry most about traditional U.S. export industries, because demand for American goods and services will decline in the face of trade wars.

This includes manufactured goods like planes, where customers abroad may shift to European alternatives. It also includes services such as tourism, which is a major source of U.S. export revenue, and higher education, where foreign student enrolments have dropped sharply. That damages not only revenues but also America’s long-term scientific and technological leadership.

High technology and biomedical research are also vulnerable. They face both supply chain disruptions and declining international cooperation. Collectively, these headwinds are already visible in reduced GDP growth forecasts and rising prices. We are not yet in stagflation, but the risks are mounting.

[00:24:44] Dominic Bowen:
In democracies, political strategy is often driven by short-term incentives, sometimes at the expense of long-term planning. You worked at the U.S. Treasury. When governments design economic strategy, how much weight is given to long-term performance versus short-term political wins?

[00:25:19] Kimberly Clausing:
At the Treasury, we had the space to think more long-term. The White House, however, was often focused on electoral cycles. That tension came up repeatedly.

Ideally, the White House would first understand what the best long-term policy is, then apply a political lens to determine what is feasible. Too often, administrations jump straight to short-term wins — for example, what will lower gas prices tomorrow — rather than focusing on the decade-long energy transition.

In the Biden administration, we sought to balance good long-term policy with electoral realities. That balance is not always struck equally well. What is unusual today is that the driver is less short-term politics and more one man’s personal whims. That is not typical of Republican administrations of the past.

[00:28:28] Dominic Bowen:
If we compare the S&P 500 to middle-class wealth, the disparity is striking. The S&P rose 24 percent in 2023, a similar increase in 2024, and another 8 percent so far this year, despite turbulence in April. Middle-class wealth, however, is flat or declining once inflation is considered.

Voter concerns about inequality, offshoring, and economic insecurity are justified. What should the U.S. be doing to address this? And how should other countries respond?

[00:29:25] Kimberly Clausing:
The stock market’s success is heavily tied to the AI boom. Strip away those firms, and the picture looks less rosy. Trade-exposed firms, in particular, have lagged.

To address inequality, we need to expand the safety net. Policies like the child tax credit, which temporarily halved child poverty, should be reinstated. The earned income tax credit, premium tax credits for health insurance, and investments in community colleges all deliver strong returns. Infrastructure and research investment also pay dividends.

As for offshoring, the U.S. tax code heavily favours shifting profits abroad. Republicans have consistently given tax breaks to multinationals operating offshore, while refusing to equalise taxation of foreign and domestic profits. This tilts the playing field against U.S. activity. Internationally, the global minimum tax on multinationals is an important step, though the Trump administration has resisted it.

[00:32:58] Dominic Bowen:
Politicians who voted for these bills might be punished, but it will be interesting to see how voters respond.

[00:33:13] Kimberly Clausing:
If you combine Trump’s signature tax law with his tariffs, the bottom 80 percent of Americans end up worse off. Only the top 10 percent benefit. It is a reverse Robin Hood policy — taking from the poor to give to the rich.

[00:33:27] Dominic Bowen:
What advice would you give to medium-sized U.S. businesses, those employing perhaps one to a thousand people, as they look at the tariff landscape for the next three years?

[00:33:53] Kimberly Clausing:
The U.S. remains relatively favourable in terms of tax and regulation, but tariffs pose a serious challenge. Businesses that rely on imported intermediate goods will face higher costs, and exporters will encounter weaker demand.

For example, a construction contractor will pay more for lumber, nails, screws, and tools. Those costs either eat into profits or force them to raise prices, which may drive customers away. Small businesses will feel this acutely.

My main advice is to make their voices heard. Small businesses have historically been effective lobbyists for favourable tax treatment. They need to lobby against tariffs too, because otherwise the playing field will tilt even more towards large corporations with political clout.

[00:36:13] Dominic Bowen:
That is excellent advice. We are still in a democracy, so let’s use it. One final question we always ask our guests: when you look at the world today, what international risks concern you the most?

[00:36:27] Kimberly Clausing:
I worry a lot about the next pandemic. We are not seeing the international cooperation on health that is needed. Climate change is another major concern. We understand the problem but lack sufficient policy ambition.

I also worry about rising nationalism and the impact on international security. Between Russia and Ukraine, instability in the Middle East, and other flare-ups, the risks are serious. Keeping these conflicts contained and moving toward peace must remain a priority.

[00:38:09] Dominic Bowen:
Thank you, Professor Clausing. The next pandemic, ascendant nationalism, and declining cooperation are risks we hear about regularly on this podcast. Your perspective today on tariffs, populism, and the future of economic strategy has been invaluable.

[00:38:16] Narration:
That was a valuable conversation with Professor Kimberley Clausing on the politics, economics, and international risks of tariffs.