What is Pix?

The Central Bank of Brazil explains Pix as follows (using Google Translate): "Within the Brazilian instant payment (IP) ecosystem, Banco Central do Brasil (BCB) created Pix, the Brazilian IP scheme that enables its users — people, companies and governmental entities — to send or receive payment transfers in a few seconds at any time, including non-business days." In "The Political Economy of Brazil’s Pix Payment System," Jeff Alvares, senior counsel at the Central Bank of Brazil, provides more background as follows:

Brazil’s payments landscape before Pix launched in 2020 exemplified market frictions. A few major banks dominated both infrastructure and customer-facing applications. Wire transfers cost $1.50-3.00 USD and took hours or days to clear. Credit card fees reached 2.2% on average, compared to 1.7% in the U.S., 1.5% in Canada, and 0.3% in the European Union. Around 45 million Brazilians, about 29% of the population, remained unbanked and excluded from digital commerce. Existing players had little motivation to incur the fixed costs of infrastructure that could cannibalize their card fees and transfer charges. Incumbent banks and card networks benefited from fragmented, costly rails.

The Central Bank conceived Pix to overcome this structural inertia. It now operates the Instant Payment System (SPI) infrastructure to provide real-time settlement around the clock. Use of this rail is mandatory for banks and major PSPs. Pix itself, the payment scheme running atop the SPI, is also Central Bank-controlled, with mandatory participation, and zero pricing for services to individuals and small businesses. (In common parlance, Pix refers to both the payment scheme and the vertically-integrated payment system including SPI).

The cornerstone of Pix’s integrated design is a combination of legal and economic barriers to potential competing payment schemes.

...

Pix’s fast, affordable, and near-universal model has achieved transformative results. It now reaches 177 million users (83% of population) and accounts for 51% of all payment methods, displacing payment cards and bank instruments alike (see chart). It processes seven billion monthly transactions worth $550 billion. For millions, it became the gateway to the digital economy.

...

Pix delivers transformative social benefits, but it does so through foreclosure rather than through competition among payment schemes. This tradeoff raises profound questions for antitrust policy and international trade law. ...

See also this follow-up piece by Alvares: "What Brazil’s Pix Reveals About WTO Rules for the Platform Economy."

USTR investigates Pix

USTR's July 2025 notice of initiation of a Section 301 investigation of Brazilian trade practices raises a general concern about "government-developed electronic payment services" without mentioning Pix by name:

Brazil also appears to engage in a number of unfair practices with respect to electronic payment services, including but not limited to advantaging its government-developed electronic payment services.

In the public comments it received, USTR heard from groups on both sides of the issue, setting out the opposing views. Below are some excerpts.

Pix critics

Critics of Pix included the US Chamber of Commerce and the Information Technology Industry Council (ITI).

The US Chamber argued the following:

PIX has been successful in expanding financial inclusion and digital access in Brazil since its launch by the Central Bank of Brazil (BCB) in November 2020. American firms partner with PIX, laud its success, and consider the continued success of PIX to be a priority. However, we maintain concerns around the fact that BCB both regulates and competes with payment arrangements (PAs). While it is not uncommon for central banks to operate one or more payment systems and supervise the private sector, the BCB has failed to establish governance procedures that avoid conflicts of interest and crowding out the private sector.

The BCB is the sole systemic regulator of Brazil's financial sector, setting market entry conditions, operational standards, and pricing frameworks for all PAs. At the same time, it operates PIX, a Central Bank-run retail payment network, which is itself a PA and a direct competitor in the marketplace. As such, U.S. electronic payment system companies must compete against their own regulator. This contradicts international best practices and guidance from the OECD, World Bank, CPMI, BIS, and WTO, all of which call for a clear separation between oversight functions and commercial activities.

Further, PIX is not subject to regulation and supervision from a third-party regulator and overseer or price or budget controls in a way that would be materially equivalent to the kind of regulation and supervision that private players face. ...

...

Brazil should commit to implementing effective measures that address the regulatory conflict of interest and anticompetitive practices described above. PIX should comply with the same regulatory, cybersecurity, and operational standards imposed on private-sector platforms and be subject to independent third-party regulation and supervision. Brazil should also ensure a clear separation between PIX's operational and regulatory/supervisory functions within the BCB to safeguard regulatory neutrality, mitigate conflicts of interest, and align with international best practices.

And ITI said:

Dual Role and Governance Concerns: The BCB is the sole systemic regulator of Brazil’s financial sector, setting market entry conditions, operational standards, and pricing frameworks for all PAs. At the same time, it operates PIX, a Central Bank-run retail payment network, which is itself a PA and a direct competitor in the marketplace. In practice, U.S. EPS are subject to a serious unlevel playing field as they must compete against their own regulator. This contradicts international best practices and guidance from multilaterals, which call for a clear separation between oversight functions and commercial activities. Furthermore, PIX is not subject to regulation and supervision from a third-party regulator and overseer, or price or budget controls, in a way that would be materially equivalent to the kind of regulation and supervision that private players are subject to.

Anti-Competitive Distortions: Private players are required to create ecosystems where participation is voluntary, whereas PIX receives certain benefits. Examples of anti-competitive distortions include:

• Access to competitive information: The BCB has access to confidential and sensitive information from its private competitors (including pricing, product development, and commercialization plans), and also manages the development and operation of PIX. Without effective governance safeguards, this structure enables the BCB to shape both market dynamics and regulatory standards in ways that advantage its own platform.

• Mandated bank investments in PIX improvements, new features, and products – and guidance that banks should prioritize PIX – without equivalent obligations for private platforms.

• Regulation dictating priority placement of the PIX icon within bank apps, ensuring prominent exposure and enhanced user experience.

• Mandatory network integration with PIX that channels retailer and consumer behavior toward the government platform, constraining growth opportunities for U.S. companies in Brazil’s payments ecosystem.

• Not equal standards applicable to PIX as competitor: Private-sector payment providers are expected to deliver top level security at all times. This means being under constant oversight from the Central Bank and investing heavily to keep systems safe and resilient. PAs are also subject to technical standards, tax collection requirements, and supervisory costs that do not apply to PIX.

• Unequal treatment of card networks to initiate transactions on PIX: U.S. card networks are not authorized to use their credentials to initiate payments via PIX. As a measure of good faith, the BCB should promptly expand the concept of payment initiation in order to permit all card networks and digital wallets to initiate payments on PIX, and to do so in a manner that would not require ongoing access to or retention of customer and transaction-related data. Such a measure would complement—not replace—existing PIX offerings and support broader adoption.

Pix defenders

On the other side, groups defending Pix were Public Citizen/Data Privacy Brasil Research and – not surprisingly! – the Brazilian government.

Public Citizen and Data Privacy Brasil Research said:

Pix is the result of a collaboration between the Central Bank, which regulates and operates it, and other private sector stakeholders, which began in 2018 with the establishment of a working group on instant payments. The private sector has been particularly involved since the design phase of Pix, and currently, there are over 900 payment and financial institutions participating in the system. The creation and continuous development of Pix is supported by the Pix Forum, created in 2019, which is composed of various market players with the goal of dialoguing with and supporting the Central Bank in defining the operating rules for instant payment ecosystems. Thus, key regulations around Pix have been developed through open and consultative mechanisms involving private banks, payment system operators, fintech companies, etc. There are therefore numerous mechanisms for private sector operators to liaise with and suggest improvements to the regulatory ecosystem around Pix.

As with other Digital Public Infrastructure (DPI) systems, Pix attempts to “open up” the payments ecosystem, thereby enabling greater competition and innovation in the fintech sector. A number of smaller companies and startups are said to be developing new services and applications around the Pix ecosystem, creating an ecosystem of diversified product offerings. As noted by an International Monetary Fund (IMF) study, the use of Pix has enabled greater competition in the financial sector as it has “led to the growth of several payment services institutions, which have established banking subsidiaries, increasing competition for deposits with big banks. The open sharing of transaction information on Pix users has helped to strengthen competition in the sales of banking products and services, including for better and cheaper payment services, among various institutions.”

...

It is important to note that Pix is not a substitute for traditional digital payment mechanisms such as credit cards. Pix has not replaced credit services; instead, it has been widely used as a real-time payment tool. If anything, Pix has driven a move away from the use of cash, rather than traditional digital payment methods. Notably, despite the huge uptake in use of Pix, studies indicate that the use of credit card systems has also increased over the past 5 years. Data show that the credit card market expanded in Brazil (with an 11.6% increase in the number of transactions in credit in the first half of 2024 compared to 2023), reaching R$4.1 trillion in total transaction volume.

And the Brazilian government said:

In establishing itself as the entity responsible for defining Pix’s rules, the BCB—recognizing the need for neutrality—chose to develop Pix as a Digital Public Infrastructure. As such, it is not exclusionary by design. This open-access system is available to all eligible institutions/entities/persons as a means to encourage innovation and the development of new business models by market participants, thereby promoting financial inclusion. Foreign entities also have the opportunity to integrate it into their systems through regulated financial institutions. To this end, BCB also became the operator and manager of Pix’s technological infrastructure, consisting of the Instant Payment System (“SPI”)—the central settlement platform; and the Transactional Account Identifier Directory (“DICT”)—the centralized database of transactional accounts linked to Pix keys.

...

The development of Pix, therefore, is at the forefront of a global trend to which the United States’ own Federal Reserve is actively contributing. The fact that the instant payment infrastructure provided by the BCB makes available to the Brazilian public an additional service, alongside other electronic payment options offered by different providers, is remarkably analogous to the development of FedNow in the United States and of similar infrastructure in other jurisdictions.

Brazil’s policies and measures do not restrict the operations or undermine the competitiveness of U.S. companies engaged in electronic payment services. Brazil does not apply differential treatment to foreign payment providers, nor does it impose licensing or operational barriers specifically on U.S. providers.

There is no prohibition on digital platforms—such as WhatsApp, Facebook, or Instagram—offering their own digital payment services. However, like any other domestic or foreign digital payment service providers, they must obtain authorization from the BCB; comply with the LGPD; and adhere to relevant, non-discriminatory regulatory requirements.

...

To reiterate, there is no discrimination against U.S. digital payment service providers—whether in the form of additional or distinct requirements, or regulatory bias vis-à-vis domestic or third-country providers. All providers, regardless of origin, must meet the same criteria for the provision of digital payment services.

There are no specific restrictions, for example, preventing U.S. digital wallets from operating in Brazil, whether for consumer or merchant accounts. They are not required to use Pix and are free to process transactions through their own systems. They must, however, like all other digital wallets (domestic or foreign), integrate with BCB-authorized institutions and comply with Brazilian regulations. No additional or differential regulatory requirements are imposed on U.S. digital wallet providers compared to Brazilian or other foreign counterparts.

There is likewise no prohibition on private payment platforms such as the U.S.-based Zelle and Venmo operating in Brazil, provided they—like all other domestic or foreign private payment platforms—secure BCB authorization, establish a local commercial presence (or partnership), and comply with Brazilian regulations.

The evidence presented herein makes it abundantly clear that Pix does not discriminate against, and does not unfairly disadvantage, U.S. companies engaged in digital trade or electronic payment services. By incorporating millions of users in the market for digital payments—an achievement of financial inclusion that has been widely recognized internationally, including by U.S. private companies—Pix has leveraged the potential of the Brazilian market for all providers, including U.S.-based companies.

Questions from the U.S. government

Pix came up at the public hearing as the Section 301 Committee asked questions of the witnesses. Nicholas Voltaggio of the Department of the Treasury asked Neil Herrington of the US Chamber the following:

The first question is for Mr. Herrington. Your testimony summary and your written comments, as well as your testimony here today, address conflicts that arise from the Brazilian Central Bank's operation and regulation of the government run electronic payment system, or PIX.

Could you please expand on these concerns and how specifically they may affect U.S. firms?

Herrington replied:

Sure, I'll say – I appreciate the question. I'll say, first of all, I want to – I'll submit a written rebuttal response just to be very, very thorough.

But on the surface, I think, certainly, as I said in my testimony, we agree, and I think our members agree, that PIX has been beneficial for issues like financial inclusion and digital inclusion.

The real – the question becomes, what – when you work as both regulator and operator. And we believe that there's a lack of transparency and separation in the governance of – between the – being a regulator and being an operator in that sense.

And obviously, there are other Central Banks around the world that operate in that sphere, but they have, frankly, much more robust governance procedures. So again, it's the division between – we'd like to see the division between – ensure competitive playing field for private providers, ensuring that the peak system is divided between – that the responsibilities between operator and regulator are clearly defined and ensure transparency and fair competition.

Sarah Bonner of the U.S. Small Business Administration then asked Sean Murphy of ITI the following:

In your written comments, you state that private players in the digital payments landscape are required to create ecosystems where participation is voluntary.

Whereas, PIX receives benefits such as access to competitive information, mandated bank investments in PIX, and regulation dictating priority placement of the PIX icon.

Could you please elaborate on how, if at all, electronic payment service providers from the U.S. or elsewhere may be affected by these alleged benefits received by PIX?

Murphy replied: 

... Let me begin by saying that Information Technology Industry Council and our members have no issue with government managed payment systems when they compete fairly with private sector payment systems.

And as my colleague from the U.S. Chamber said a moment ago, in the case of Brazil, this is not the situation.

The Central Bank of Brazil both regulates the financial sector, including many of the measures you just referred to, which are in our long form comments, but also operates a state championed entity that is a competitor to the private sector companies.

... on digital devices where you would normally access and conduct financial transactions, PIX is given prominent places.

For example, if you were – an equivalent would be if you were to walk into a bricks and mortar store and a competing product that is supported by the government has prime placement in a store and you have to then go search to find other alternatives that are operated by commercial service providers, it is itself, a de facto discrimination, and an impediment to fair access. ...

Some post-hearing comments are here: US Chamber; ITI; Brazil.

The USTR Determination

USTR took all this in, and in its determination came out on the side of the critics, offering the following conclusions on the issue:

Brazil has unfairly disadvantaged U.S. companies engaged in competing electronic payment services, including by policies that favor its national champion Pix. The Brazilian central bank established the instant payment system Pix in November 2020. Pix connects financial and payment institutions (‘‘participating institutions’’) with individuals, firms, and government entities to provide instant or scheduled payments, cash withdrawals, payment invoices, and short-term borrowing, among other services. The Brazilian central bank’s dual role as regulator and owner/ operator of Pix creates a conflict of interest, in the absence of adequate procedural safeguards. The bank has acted as a regulator to disadvantage U.S. electronic payment services providers and preference Pix. For example, the central bank mandates the use of Pix by financial institutions with more than 500,000 accounts and requires that Pix be displayed on participating institutions’ main application screen with no less prominence than any other payment or transfer functionality. In addition, the central bank encourages use of Pix over other services by mandating that participating institutions (including institutions that it requires to participate in Pix) offer Pix for free to individuals and by capping the fee those institutions may charge businesses for Pix transactions.

The acts, policies, and practices of Brazil related to its preferential treatment of Pix are unfair and discriminatory. It is unfair to require competitors to provide advantages to Pix, such as availability, visibility, and fee caps, and Brazil discriminates against U.S. electronic payment services suppliers by providing those advantages only to Brazil’s national champion. The acts, policies, and practices of Brazil related to its preferential treatment of Pix are a burden or restriction on U.S. commerce by imposing costs on U.S. services providers and by forcing U.S. providers to promote their Brazilian competitor, without compensation.

Some other views

In a recent article, The Economist says not so fast on USTR's conclusions:

The Trump administration also complains that Brazil’s central bank both operates Pix and regulates it. The arrangement does raise legitimate questions about giving so much control over a payments system and the financial data it generates to a single institution. But those are concerns about concentration of power, not about discrimination against foreign firms. Governments build, own and regulate essential infrastructure routinely. There is nothing inherently discriminatory about applying the same model to payments, points out Monica de Bolle of the Peterson Institute for International Economics, a think-tank in Washington.

The second assumption—that Pix has harmed American payment companies—is also weak. It rests on a misunderstanding over why Pix was created, says Daniel Santos Kosinski, a professor of economics at the State University of Rio de Janeiro. Before Pix, existing services, including those offered by foreign firms, charged fees for electronic payments that poor Brazilians could not afford. Pix was built to change that. The central bank estimates that at least 70m people have entered the formal financial system since its launch.

Far from cannibalising other electronic payment methods, Pix has expanded the market. It has done so at the expense of cash and cheques, the use of which has plummeted. The number of cash withdrawals made every quarter has fallen by 46% since Pix was introduced ...

That does not mean incumbents face no pressure. Pix has changed the economics of payments. Bernardo Guimarães of Getulio Vargas Foundation, a university in Rio de Janeiro, says this may eventually squeeze the profits of Visa and Mastercard—but through lower fees, not fewer transactions. Businesses in Brazil typically pay around 2% of credit-card sales to a payment processor. A Pix payment costs next to nothing. The result is greater pressure on all payment processors, big and small, to justify the fees they charge.

The Trump administration’s deeper concern may be that Pix becomes a model for the rest of Latin America, eroding American card networks’ profits and their influence across the region. But that, too, is misguided. Pix was the product of Brazil’s particular circumstances: a powerful and trusted central bank that could require big banks to join the system, and a huge domestic market in which millions of people still relied on cash. It also took years to design and test. Few if any countries in Latin America have the same conditions.

The Pix trade dispute and sovereignty

It's clear that USTR has a good deal of discretion under Section 301 to find that foreign acts, policies, and practices are unfair trade practices on the basis of their impact on U.S. economic interests, and my sense is this discretion is broad enough to allow USTR to have reached its Pix determination. But should it have done so? How hard should the U.S. push in areas that U.S. trading partners will consider sensitive ones that implicate sovereignty?

In the pre-Trump trading system, some U.S. critics of that system – including those who later worked on trade policy under Donald Trump – worried about its infringements on sovereignty. However, when Trump was in charge, it sometimes seemed like these critics were looking to defend U.S. sovereignty but not particularly interested in foreign sovereignty. In the case of Pix, we are dealing with a policy/program of a central bank, which I would think involves a high degree of domestic political sensitivity. If sovereignty is a concern for people, payment systems set up by a central bank seem like an area where this principle should play a role in the decision-making about whether an unfair trade practice exists.

I can see the argument that the way Pix has been set up has some degree of negative economic impact on U.S. companies such as Visa and Mastercard. But if negative economic impact is the standard, a wide range of what most people would consider to be non-discriminatory laws, regulations, and policies could be the subject of trade disputes. The further we go beyond non-discrimination as the core principle underlying the trading system, the more we encroach on sovereignty and the more trade conflict we are likely to see.

Of course, if you believe that as the largest economic power, you can push others on their sensitive domestic policies while avoiding anyone pushing on yours, this is not necessarily a problem for you. But if, on the other hand, you are looking for principles that can sustain a durable trading system, this may not be the right approach.

During an interview with the CBC in the afternoon, host Rosemary Barton asked U.S. Trade Rep. Jamieson Greer the following question:

It's a better deal ... than yesterday, but it's not a better deal than when CUSMA itself was being respected by the United States, which is not the case now, Ambassador, as you know. And one of the things that Prime Minister [Carney] also raised was this issue of reliability. He points to the fact that other countries have made deals with your country. He said it looked like they were signed on pencil because they've changed overnight. So why would Canada sign a deal without even any guarantees that you would continue to respect the deal, given that you haven't respected CUSMA?

Greer started his reply by focusing on the Trump administration's recent bilateral deals:

So which deal is that that we haven't respected that we've signed over the past year? Like, I'm just not familiar with that. I mean, we have made a dozen deals ...

Barton jumped in to make it clear she had the USMCA in mind:

You've added tariffs. I'm talking about Canada. You've added tariffs, right, above and beyond the free trade agreement, and that sort of contradicts what a free trade agreement is, of course.

In response, Greer talked about the USMCA review, and then emphasized the agreement's security exception as the reason for any new tariffs that would otherwise violate the deal:

... USMCA includes specific exclusions for national security measures, and so steel, aluminum, autos – these are all national security measures for us that fall within the exclusions within USMCA. ...

This exchange jumped out at me (the whole interview is worth a watch), because earlier in the day I had been doing a webinar on the USMCA where I was asked a very similar question. Karthik Sankaran of the Quincy Institute asked me the following:

[Juan Carlos Baker Pineda] already mentioned you have all these different tariffs ... floating around. And you have this process where some things are exempt, but clearly other things are a violation of U.S. commitments under USMCA, and one of the lines in Mark Carney's kind of ... walkout mic drop, so to speak, was these agreements were signed with a pencil. What does that tell you about U.S. intentions? ...

My response was:

My sense of the Trump administration is it sees all of these statutes that Juan Carlos referred to – 301, 232, 338 – ... as taking priority over the USMCA and any other international trade obligations. So they will observe those agreements unless they decide not to and decide to impose tariffs under one of those statutes for whatever reason. And when they do decide to impose tariffs, they will often have a justification under the agreement. So they'll say, "Well, this is for national security. We're invoking the national security exception," which they've done many times now. ... So ... , in their view, or their stated view, [they] are technically complying with the agreement.

Or in the case of these Section 301 tariffs that are being imposed in response to concerns about forced labor, maybe they would say, "Well, here, these are justified under the public morals exception."

So, regardless of what their explanation is, and they will generally have one if pressed, they don't feel too constrained by these agreements. So, I think that's the written in pencil part right there.

So, maybe what we're seeing here is sort of the famous saying of "we're observing it in the breach." ...

Am I right about that? Given the scope of the Section 232 tariffs in Trump's second term, it certainly feels that way. So many products are being covered at this point that the connection to national security, which was weak to begin with, seems totally severed. And if that's the case, how reliable are any of these agreements? I feel like Greer's point at the outset may have been that, putting aside the older trade agreements, the Trump administration will comply with the tariff commitments in the new bilateral agreements it has signed during the second term. But how can trading partners rely on that? What is special about these agreements that distinguishes them from, say, the USMCA or the revised KORUS FTA, which were negotiated by Trump during his first term? What is stopping the Trump administration from imposing tariffs for security reasons in ways that conflict with the tariff commitments made in the recent bilateral agreements? These are questions that U.S. trading partners are probably wondering about, and I'm not sure what the answers are.

Americans pay far more for brand-name drugs than Europeans do. For years that was treated as a domestic health problem. The Trump administration has started treating it as a trade problem, and in June 2026 it opened a Section 301 investigation into Germany's drug pricing.

This post asks whether a German-style 301 investigation would work against France (another European country often cited as a problem by U.S. government officials and pharmaceutical companies). It proceeds in three parts. First, it explains the Section 301 investigation against Germany, specifically, what USTR is alleging and why. Second, it explains how France sets drug prices, since similar action against France would have to address the system in place there. Third, it looks at the debate inside France over how to respond to American pressure, which turns out to be less united than it first appears.

The German Section 301 case gets things rolling

Section 301 of the Trade Act of 1974 provides a set of procedures under which USTR can investigate a foreign country's trade practices. Among other things, actionable conduct under Section 301 includes acts, policies, and practices of a foreign country that are “unreasonable or discriminatory” and “burden or restrict U.S. commerce.” If USTR finds that such conduct exists, the U.S. government can take action, usually with tariffs.

The key evidence behind USTR’s investigation in the German pharmaceutical case is that U.S. consumers pay roughly 3.9 times what German consumers pay for brand-name drugs. USTR traces that gap to two specific German practices. The first is a rule that ties price confidentiality to a discount, meaning a manufacturer can keep its negotiated price secret only by accepting a discount. The second is a draft law that would add a mandatory rebate on patented medicines, which the industry expects to grow over time. USTR’s initiation notice suggests that these practices – one in effect now, and the other possibly coming into force soon – together push German prices below fair market value and leave Americans to fund the difference (through higher prices in America).

The investigation against Germany grew out of the May 2025 “Most-Favored-Nation” executive order, which set out to ensure that U.S. consumers should pay no more for a drug than the lowest price paid by any comparable developed country. The Trump administration is trying to achieve this goal by raising foreign prices through trade pressure (there have also been moves by the administration to lower U.S. prices, although it remains to be seen how successful they will be). The United Kingdom already agreed to pay more for new U.S. medicines in exchange for tariff relief. USTR urged Germany to follow suit, but after months of talks, Germany instead advanced legislation to further cut spending on innovative drugs, and the investigation followed.

Will France be next?     

Beyond Germany, France is another EU nation that has often been cited as a particular problem in relation to its drug pricing. In France, a single national insurer, the Sécurité sociale, covers nearly everyone. Because one buyer pays for almost every prescription (an arrangement that is used in many countries around the world), that buyer negotiates prices that apply to every purchase, and there is no free market price for prescription drugs.

Every individual drug proceeds through four steps before it has a price and enters the market:

• Authorization (AMM): The drug is approved for safety and effectiveness, usually through the European Medicines Agency. Price is not discussed at this stage.
• Grading (HAS): A public agency, the Haute Autorité de Santé, evaluates the drug through its Commission de la Transparence. It issues two ratings. The SMR decides whether the drug is useful enough to be reimbursed and sets the reimbursement rate; and the ASMR measures how much better the drug is than existing treatments, on a scale from I (major advance) to V (no improvement), and is the main driver of price.
• Price (CEPS): A government committee, the Comité économique des produits de santé, negotiates the actual price with the company. This is the step that matters most for what’s at issue with the current U.S. 301 investigation, for three reasons given below.
• Reimbursement rate (UNCAM): A separate body sets what percentage of the price the state pays back, and the health minister formally lists the drug.

The CEPS stage is worth focusing on, because it is where the price is negotiated between the state and the manufacturer, which is the same kind of government price-setting that the investigation against Germany targets. Three features of CEPS matter here:

• It is not independent. CEPS sits under the authority of the health, social security, and economy ministries. The state appoints its president and holds the majority of its seats.
• The company cannot simply walk away. If no agreement is reached, CEPS sets the price by its own decision. The relevant ministers can override that decision, jointly setting the price themselves within fifteen days, but the initial decision by CEPS does not require approval.
• The published price is not the real price. On top of the official price, the manufacturer pays confidential rebates (remises) back to the state, negotiated drug by drug. So the list price overstates what France actually pays.

The CEPS stage is likely to be the focus of a Section 301 investigation. The first two are clinical judgments, while the third is a budget decision. And the confidential rebates in step three are the same hidden discount USTR is attacking in Germany. This raises the question: does France show the same price gap that started the German case?

To check, we can turn to RAND Corporation's 2022 price comparison, which looks at U.S. prices compared to 33 OECD countries. Its figure for Germany, 3.87 times, lines up almost exactly with USTR's 3.9× claim, which makes it a reliable benchmark for measuring France in the same way. The RAND Corporation finds that U.S. prices for brand-name drugs are 445% of French prices and 387% of German prices. In other words, the U.S. pays about 4.45 times French prices versus 3.87 times German prices. RAND states plainly that France and Japan generally have the lowest prices for brand-name drugs among the 33 OECD countries in the analysis.

Source: RAND Corporation, International Prescription Drug Price Comparisons: Estimates Using 2022 Data (RRA788-3), Figure 3.2, p. 17.

The same pattern appears in the HHS/ASPE analysis of the same data: U.S. brand-name prices were 422% of the average across 33 OECD countries, whereas U.S. generic prices were actually lower, about 67% of other countries' prices. The price gap is therefore a brand-name phenomenon. On generics, which make up 90% of U.S. prescription volume, the U.S. pays less than its peers.

There are two caveats to keep in mind. All of these figures are gross, list-based prices. RAND could adjust the U.S. side down for rebates (bringing the brand-name figure from 422% to 308%), but it could not do this adjustment for countries where there are confidential rebates. RAND notes specifically that “German sickness funds receive statutory rebates not reflected in manufacturer sales.” France's remises work the same way. So the true gap that France has is actually smaller than 4.45 times by an unknown amount. However, the main claim holds: on brand-name drugs, the category USTR is targeting, France is a bigger outlier than Germany.

The French response

France is not united on the issue, with a strong internal divide emerging. In 2026, a rare coalition formed on a proposal to make the real, net prices of drugs public, instead of keeping the rebates secret. The left (La France insoumise, the Socialists, the Communists) and the National Rally, parties that agree on almost nothing, all supported it. In parliament, opposition came from the presidential majority, which voted against. The executive and the relevant ministries also warned that transparency would strip France of its main bargaining tool, prompting some criticism, such as from Médecins du Monde.

Other groups have entered the debate too:

• Industry (LEEM): The drugmakers' association, LEEM, wants the government to freeze price cuts and abolish the safeguard clause (a yearly cap on total drug spending: if national drug sales exceed the limit, manufacturers collectively pay back the overage). It warns that new tariffs on medicines would threaten patient access and drug supply. LEEM was also questioned directly by the Assemblée nationale on pricing mechanisms in March 2025.
• Critical press (Veltis/Le Figaro): The argument here is that if the U.S. forces lower prices at home, companies will raise prices in Europe to compensate, and France, with some of the lowest prices in Europe, is the most exposed. Veltis, a consultancy quoted by Le Figaro, put it bluntly: to protect their main market, companies “will have to raise the prices negotiated in Europe… or give up selling their new drugs there.”
• Reformist (Bizard): The economist Frédéric Bizard argues that France should treat the American pressure as a chance to rebuild a pricing model he considers broken, rather than a threat simply to resist. He also confirms the mechanism that connects the American policy to France directly: because the U.S. now targets the lowest price in Europe, and that price is often France's, companies such as Pfizer threaten not to launch new drugs in France at all.

Some tentative predictions

So, would a Section 301 investigation along the lines of the one underway against Germany work against France? Just looking at the numbers, if you apply USTR's analysis of the German policies to the French situation, the case is there. The price gap that justified the German investigation is not only present for France, it is larger. And the French system concentrates price-setting in a state committee, which provides evidence of a government practice of the type Section 301 is designed to address. At the same time, whether any such practices – in Germany, France, or elsewhere – are “unreasonable or discriminatory” and “burden or restrict U.S. commerce” is a question still open for debate (although the Trump administration's views on this are probably not in doubt at this point). 

A complicating factor here is the same one running through the whole story: France's low prices come partly through confidential rebates, the same secrecy USTR is attacking in Germany. That makes the gap real but hard to measure exactly. Whether the administration turns to France next may come down not to the strength of the case, but to the particular priorities of the Trump administration, along with various non-trade aspects of the U.S.-French relationship.

Despite intensive negotiations from August 19-21, 2026, Canada and the United States failed to reach an agreement that would have suspended the 50% tariffs the U.S. threatened a month ago on $20 billion worth of Canadian exports to the U.S. (The list includes hockey equipment, cement, alcoholic beverages, paper pulp, and many others.) Those tariffs, covering roughly 5% of total Canadian exports to the U.S., are significant in part because they are the first large group of USMCA-compliant goods that have been subject to prohibitively high (50%) U.S. tariffs, reflecting another flagrant U.S. violation of the USMCA. (New US Tariffs) (The previous U.S. tariffs on USMCA-compliant goods were on goods in specific sectors, pursuant to investigations under Section 232.)

It emerged Saturday morning, August 22, that several major new demands by the United States had contributed to Prime Minister Carney's decision to suspend the negotiations, even though it meant imposition by the U.S. of the 50% tariffs. According to Carney, "the U.S. introduced at the last hours efforts to restrict our ability to have other trade deals."  (Carney August 21 Speech) Canada in recent years has concluded various trade deals along with economic and security partnerships, including major free trade agreements with the EU, the UK, India, South Korea, and members of the Comprehensive and Progressive Agreement for Transpacific Partnership. A major element of Carney's economic policy since he took office in 2025 has been to seek to double Canada's non-U.S. trade from 20% to 40% of the total over the next decade, to be achieved in significant part by concluding new or expanded trading arrangements. (Trade Diversification) Given that Ambassador Greer, Commerce Secretary Lutnick, and other U.S. officials knew that trade diversification through an expanded network of trade agreements is a hallmark of Carney's economic policy, it is reasonable to ask whether this apparently last-minute demand was a deliberate (and successful) effort to scuttle the negotiations.

 Other ‘red lines” for Canada reportedly included a refusal to reduce tariffs on medium and heavy trucks, which was considered essential to preserve the Canadian automotive industry, and pressure to curtail the use of French in streaming services and French content requirements in Quebec and elsewhere. (Red lines) The U.S. reportedly also sought “exclusive access” to Canada’s critical minerals. (Critical mineral access) (Bloomberg reported that U.S. negotiators had been willing to eliminate a lumber tariff, a decades-long irritant in bilateral relations, but no details were provided.)

While I have no inside information, reliable public reports last week (before the alleged last-minute U.S. demands) suggested that Prime Minister Carney was willing to remove retaliatory tariffs on Canadian imports of U.S. automotive products, steel and aluminum; improve to at least a limited degree U.S. access to Canada's dairy market; and pressure the premiers of eight Canadian provinces to discontinue the boycott of American wine and distilled spirits in provincial liquor stores. (These were three of the major U.S. complaints that generated the July threat of tariffs.) (Settlement Proposals) Ultimately, what Carney was reluctant to accept, presumably for the longer-term, were lower but still prohibitively high tariffs on three mainstays of the Canadian industrial economy, steel and aluminum (50% to 25%) and autos (25% to 15% on the non-US content). According to some published reports the 25% steel tariff (but not the lower aluminum tariff) would only have applied to the first four million tons, with additional exports reverting to 50%. (Steel quota) Derivative steel and aluminum products were to be subject to varying rates.

It also seems evident Canada had concluded, based on their own and other countries' experience with the constantly varying levels of Trump's tariffs over the past 18 months, that any deal concluded at this time could never be regarded as final, as it might be changed in the future based on Trump's whims. As Carney suggested in his August 22 speech to the nation, U.S. trade agreements are “signed in pencil.” (Written in Pencil)

Implications

The failure to conclude the deal is a defeat for many stakeholders throughout North America, with the ongoing uncertainties continuing to retard both foreign and domestic investment and job creation now and for the foreseeable future. Some of the smaller Canadian producers of the goods subject to the new 50% tariffs, and their U.S. customers, may not survive. Canadian exporters and U.S. buyers of steel, aluminum and autos will continue to face higher prices. American wine producers will continue the emasculation of their largest export market. (US wine exports)

The tariffs on aluminum seem particularly unwise since the U.S. is not a leading producer due to prohibitively high electricity costs and local opposition to new based on adverse environmental impacts. (Oklahoma Smelter Opposition) Nor is it in the U.S. national interest to become more dependent on leading foreign producers Russia and China--where "national security" concerns are not bogus– for U.S. aluminum needs. (Aluminum shipments from the UAE may be welcome at 50% tariffs but have been disrupted by the Iran war.) Petroleum interests in Alberta, which for the first time in a decade saw the possibility of a revival of the XL pipeline project (an objective shared by Trump), are no doubt disappointed, as are refineries throughout the U.S.

The U.S. attempt to restrict Canada’s agreements with third countries, the latest escalation of the Trump/Greer trade war with Canada and potentially all other U.S. trading partners, is deeply troubling for reasons that go well beyond additional fracturing of what until January 2025 was the United States' premier political and military as well as economic relationship. Significantly, the United States is attacking trade agreements that are consistent with Article XXIV of the GATT, which has authorized limited discrimination under certain conditions in favor of FTA partners since 1947 (as with the USMCA among the U.S., Canada, and Mexico, which Trump championed). It is one affront to provide in USMCA Article 32.10 that Canada and Mexico may not conclude new trade agreements with non-market economies (e.g., China). These broader restrictions on third country trade agreements are a challenge to sovereignty that neither Canada nor most other U.S. trading partners are prepared to accept, even when many have already tentatively concluded one-sided trade "deals" with the United States.

This latest iteration of the trade “war” (Carney’s term) is far from over. Carney, with strong backing from l provincial leaders and many Canadian businesses, has promised “dollar for dollar” retaliation, which will almost certainly result in counterretaliation by the United States, as Ambassador Greer has promised. (U.S. Counterretaliation) Whether and when bilateral negotiations will resume is uncertain. One likely result of the impasse is that even more Canadian citizens will continue to boycott U.S. wine, distilled spirits and other products and avoid vacation travel to the United States.

Impact on Mexico

If anyone sees a silver lining to this cloud it could be Mexican President Sheinbaum. Had the deal with Canada gone forward, her cordial relationship with Trump compared to Carney's frostier one could have attracted broad criticism in Mexico, despite recent friction over Trump’s demand that the U.S. be permitted to send troops into Mexico to fight drug cartels. (US Troops to Mexico). Formal USMCA negotiations between the U.S. and Mexico that began months ago are scheduled to continue in September. (Next US-Mexico Talks)  At present, Mexico has little to show from them other than Trump and Greer's kind words.

 Moreover, Mexico is apparently still facing US demands for 50% U.S. content to qualify for (unspecified) reduced auto tariff access to the U.S. It also seems likely that the U.S. will be reluctant to offer Mexico a better deal than the 25%-25%-15% (steel, aluminum, autos) reduced tariffs offered to (and rejected by) Canada. Unlike Canada, Mexico is benefitting from greatly increased AI computer server exports to the U.S. which for the most part enter duty-free. (Mexico recently passed Taiwan to become the number one U.S. source.) (Mexican Server Exports) Unfortunately, with a Mexican value added estimated at only 5%-7%, the server boom helps the export numbers (with the increasing trade surplus a risk), but it will do little to stem unemployment in the automotive sector.

The new U.S. demand relating to Canada’s third-country trade agreements is also a wake-up call for Mexico, which currently has free trade agreements with the UK, the EU, the European Free Trade Association, Japan, the Transpacific Partnership members, the members of Latin America's Pacific Alliance, and dozens of other countries. (Mexico's free trade agreements) Those agreements are designed to be consistent with GATT Article XXIV or the 1979 GATT Enabling Clause (which permits FTAs among developing countries under more flexible rules than GATT article XXIV). (Enabling Clause) If Canada is being challenged because of its third-country trade agreements, Mexico has no assurance that it will not be next on the list.

David A. Gantz

Will Clayton Fellow for Trade and Int’l Economics,

Baker Institute for Public Policy

Peter offered some partial support for my view, in particular on my skepticism of the political importance of tariffs as revenue generators. Heather, whose original comments on this issue were the trigger for my post, pushed back a bit. In doing so, she elaborated on her points about the incremental value of tariff revenue in making the U.S. fiscal situation a bit more sane, as well as the constituencies that develop around specific tariffs.

Let me first note that, as their LinkedIn profiles make clear, both Heather and Peter have spent a good deal of time working in the executive branch, and I am quite sure their insider experience gives them insights that I don't have. As a result, I take seriously anything they say on these matters.

At the same time, I think that working on the inside can put you in a bubble to some degree, and sometimes the thoughts of a naive, idealistic outsider can be useful. I'm happy to play that role here!

Putting that theory into practice, as an outsider, it seems to me that there can sometimes be so much caution and care in political decision-making that we end up with something close to paralysis. If people agonize too much about how every interest group and faction will view a policy decision, they may end up with a bad decision or no decision at all. Sometimes it's better to trust your instincts and just go for it.

The practical risk here is that the agonizing could lead to an overly cautious approach to changing various Trump policies. There are a wide range of these policies that a future Democratic president would likely object to, including foreign policy interventions, insufficient protections for workers and minorities, immigration crackdowns, income taxes, spending choices, and, of course, tariffs. Our hypothetical Democratic president – it could be a Republican taking over, of course, but at this point let's just focus on how a Democrat would handle things because it is simpler in some ways – will have to look at each one, and make a decision on how quickly and thoroughly to reverse course. As part of this, a key question will be whether to shut things down immediately and develop a replacement later, or to keep things in place while a new policy is worked out.

I understand the desire for caution, but I can also imagine that if you don't do certain things right away, they may not get done at all. Four years can seem like a long time as you are entering office, but with everything you will have to deal with, it may feel like it goes by more quickly than you expected.

Getting back to the policy at issue here, in the case of the Trump tariffs a key point is the link between tariff revenue and budget deficits. It seems to me that a future president could make the case for revisiting both of the main components of that deficit (income tax and spending levels), and in that context explain that the tariffs haven't made much of a dent in the budget deficit (and in the meantime have led to problems in the domestic economy and in international relations).

Will there be certain constituencies that object to the removal of these tariffs? Sure, but as part of the broader policy review that would be taking place, I suspect that the people staffing this new administration can think of ways to keep these constituencies happy.

Anyway, let's have the midterms first, then come back to this issue next year!

During the past several years, the composition of Mexican exports to the United States has significantly changed. Auto and auto parts exports have decreased because of high Trump administration tariffs designed to shift production for the U.S. market from Mexico (and Canada) to the United States. (Trump tariff policy) Simultaneously, Mexican exports of the servers required to satisfy the apparently insatiable demand for AI data centers has skyrocketed. An estimated $650 billion investment in U.S. data centers is expected in 2026. (data center investment) Mexico now provides an estimated 40% of U.S. server imports, with sales reaching $46.9 billion for the first seven months, second to Taiwan, with sales of $53.5 billion. (Vietnam is third, with those three country suppliers largely replacing U.S. imports from China.) (US AI Server imports)

Servers and related hardware made up almost one-fifth of the $317 billion of goods Mexico exported to the United States between January and May 2026. This reflected a more than 100% increase compared to the same period a year earlier. (Mexican AI server exports)

Although specific import/export data is not available, it appears that at least some companies producing AI data servers in Mexico are exporting them to Canada as well as to the United States. Nvidia is reported as importing servers for its Canadian operations from Mexico under the USMCA. (Canadian server imports) Although volumes are not available, Nvidia recently announced that it had partnered with Ciara Technologies to assemble some AI servers in Montreal. (Nvidia Canadian server production) AI data center operators in Canada including Nvidia have greater sourcing flexibility since Imports of servers from third countries such as Taiwan, unlike into the United States, are generally duty free under the WTO’s Information Technology Agreement. (Zero Server Tariffs)

In the short and medium-term at least, server exports have thus helped to keep the Mexican economy from tanking. (Mexico's economic outlook) However, the server production phenomenon in Mexico raises major questions. Can the mostly Taiwanese new investment be sustained despite such concerns as Mexico's poor investment climate and the uncertainties that are a product of Mr. Trump's tariff policies, including the uncertain future of the United States-Mexico-Canada Agreement (USMCA)? Can server production help to replace lost automotive jobs? Will a significant percentage of the materials and components required for server production ever be sourced in Mexico, or will most of the value added continued to be imported from Taiwan, China, and the United States? Finally, what happens to the industry in the unlikely event that U.S. demand for new data centers diminishes because of electric power shortages or public opposition or, worse, if the AI craze turns out to be a "bubble" that bursts sooner rather than later? I seek to provide at least partial answers below.

Mexican Server Production and Exports

Development of Mexico as a major source of server production for U.S. AI data centers is a recent phenomenon. (Mexico: cornerstone of American AI boom) The servers, specialized computers used to store, manage, and process data inside AI data centers, are the major building blocks for data centers. “An AI data center is purpose-built … to handle AI training and inference.” AI workloads are estimated to require ten times more computational power than traditional applications. Three thousand AI centers are estimated to be under construction or planned globally by 2030, representing an estimated $7 trillion in total investment, with $3 trillion in the United States. For example, Texas currently has more than four hundred projects in the pipeline. (AI data centers)

Several considerations appear to have encouraged nearshoring of AI data server production to Mexico. Taiwanese enterprises, the principal source of Mexican server investment, were not surprisingly attracted by lower tariffs on exports to the United States, close physical proximity to the rapidly expanding U.S. market for data centers (and other high-tech electronic components), the desirability of diversification away from Taiwan, and lower labor costs for competent workers. (Taiwan nearshoring to Mexico) In particular, for most AI server exports to the United States, tariff treatment is favorable, with no specific regional value content requirement under USMCA rules or origin. (Server Tariff treatment) For Mexico, the disadvantage of this treatment is that there is less incentive for foreign producers to seek local components when imported components can be used without affecting duty-free entry.

Significantly, Taiwanese enterprises such as Foxconn decided to locate manufacturing facilities in Mexico in part because American tech giants including Amazon, Google, Microsoft, and Nvidia strongly encouraged Taiwanese enterprises to establish server production there. (Encouraging Server production in Mexico)

Among the logistical advantages, supplying necessary third-country parts and components to factories in Ciudad Juárez and other border cities is relatively straightforward: a container unloaded at Los Angeles or Long Beach can reach Mexico in less than two days. Shipping the heavy servers to data centers in most of the United States by truck is also manageable. Like many other Asian enterprises that have established manufacturing operations in Mexico, Taiwanese businesses do not seem overly worried with rule of law issues in Mexico although some concerns have been expressed. The advantages of co-production with Texas are also considered important. (Texas Co-production)  Other challenges, such as electric power and water shortages, could become more of a problem for new Taiwanese and other investments in the future.

Many of these same considerations have encouraged substantial direct foreign investment in Mexico for many years, despite concerns over crime, corruption, poor infrastructure, electricity shortages and a weak judiciary and regulatory uncertainty. (Mexico's Investment Climate)

Developing Mexican Supply Chains

A major challenge for Taiwanese server enterprises and for the Mexican economy itself is developing component production in Mexico so imports can be reduced and more local jobs created. The North American automotive industry, because of integration of Mexico with the United States and Canada, has done remarkably in producing parts and components by more than twelve thousand enterprises both large and small. (North American auto parts producers) However, historically, the electronics industry in Mexico has not done nearly as well. Consequently, flat screen TV producers (e.g., Visio in Baja California) and laptop producers (e.g., Lenovo in Nuevo León) must rely on a limited if slowly growing local supply chain. (electronics supply chain) Currently, as Christine Smith and Alan Murray for the Financial Times have noted,

Ciudad Juárez, across the Rio Grande from El Paso in Texas, is at the heart of the [AI server] industry, building off the border town’s existing Taiwanese factories that have been making simpler electronics for decades. The new production lines assemble parts shipped from Asia into AI servers, which are stacked in refrigerator-sized racks that can weigh more than two tonnes each and are then trucked across the border. (server assembly)

Taiwanese producer Pegatron is reported to have five assembly plants in Ciudad Juárez. It is arguably in everyone's interest to encourage relocation of Taiwanese and other Asian parts production for servers (and other electronic products) to Mexico, to lower costs and shorten supply chains, among other considerations.

Impact on Employment in Mexico

The Mexican automotive industry lost an estimated 320,000 jobs (out of almost two million), 2024-2025, due not only to tariffs but to production of EVs (using far fewer parts than gasoline-powered vehicles), increased automation and continued reliance on vulnerable Asian suppliers. (Employment decline)  By the end of the first quarter of 2026, exports of autos and auto parts to the United States declined by $4.87 billion, or by 11% compared to 2025. (Auto exports decline)

In my view, there is no reason to believe that major auto and auto parts producers for the U. S. market will fail to respond to the Trump administration's demands that they relocate at least some operations to the United States. Should USTR Jamieson Greer convince Mexico to accept a new 50% US content requirement for autos exported to the United States, Mexico's industry employment is expected to continue to decline, as Mexico currently accounts for 42% of all U.S. auto parts. (Fifty percent U.S. Content Requirement) Thus, a key factor is the extent to which it is feasible to shift and retraining auto workers for server production or other employment (which as noted below seems unlikely).

Unfortunately, reliable employment data are not available as of this writing. Fernando Alba, deputy economy minister in Chihuahua state, where Ciudad Juárez is located, is quoted in the Financial Times as observing, "One truck [of servers] is the equivalent of one thousand cars.” Unfortunately for the Mexican labor force, one thousand cars require far more workers than a truckload of servers produced in highly automated plants. Data provided by experts to the Financial Times’ reporters indicates that under current conditions that server production could realistically aspire to reach 3-7 per cent Mexican content, primarily regional direct labor, facility overhead, and localized logistics, compared to 39 per cent for autos. Nor does there appear to be any significant Mexican impact on product design. (Mexican content in servers) The director of the Claudio X. Gonzalez Center for the U.S. and Mexico, Tony Payan, recently shared with me his on-site observations that manufacturing in Ciudad Juárez began a decline before the beginning of the second Trump administration and is continuing despite expanding AI data server production.

Still, some auto industry employers might find employment in the data server industry. Workers with experience in assembly, production, quality control, maintenance, and supervisory roles could be transferrable, according to Luis Ricardo Rodriguez, managing director of Monarch Global Industries in Monterrey who counsels multiple foreign investors in Mexico. He notes that the capacity to absorb displaced automotive workers depends heavily on the type of operation. Server assembly, final-device manufacturing, and some back-end semiconductor activities are more labor-intensive, while semiconductor fabrication and other advanced manufacturing processes are significantly more capital- and skill-intensive. Many positions in data server production positions would require technical retraining, specialized skills, and, in some cases, English proficiency. As a result, these investments could absorb part of the displaced workforce, but probably not automatically or on a one-for-one basis.

Nevertheless, in time it seems reasonable to expect that higher Mexican component content could gradually be achieved, some of it much more labor-intensive than AI server assembly. A substantial share of the value incorporated into Mexican electronics exports is still generated abroad, with China, Taiwan, Korea, Malaysia, and Singapore remaining key suppliers, particularly of high-value components. But the domestic supplier ecosystem is gradually expanding, according to Rodriguez. Some multinational electronics companies already source a meaningful portion of their supply chain locally, in areas such as printed circuit boards, substrates, wiring, packaging materials, metal components, and other back-end manufacturing inputs.

As far as broader North American sourcing is concerned, it also seems reasonably possible that TSMC, a giant Taiwanese semiconductor producer with more than $265 billion of actual and planned investment in Arizona, will eventually be supplying some of the chips necessary for server production in Mexico from the United States, although currently most imports are from Asia. (https://www.taipeitimes.com/News/editorials/archives/2026/07/29/2003861544). Other American chip input to server assembly in Mexico could also be significant as eight of the world’s top chipmakers—Nividia, AMD, Intel, Alphabet, IBM, Meta, Broadcom and Qualcomm—are U.S. companies, although many of the chips they make are not currently produced in the United States. (U.S. computer chip producers) One estimate suggests that a single AI server rack contains at least 4,500 chips accounting for as much as 95% of the content value of a server ranging from inexpensive foundational chips to unique integrated circuits. (Chip value in servers)  (Chip varieties) Among other important considerations, sourcing more of the chips from the United States may be feasible if increased incentives for domestic production and for upstream materials are implemented. (U.S. Production Incentives) An added political and economic benefit from more U.S. sourcing would be reducing Mexico’s trade surplus with the United States.

Nor are U.S. policies regarding automotive industry imports likely to be extensively reversed in 2029, regardless of which political party gains the presidency. The U.S. auto unions, which have broad influence on many Republican as well as Democratic politicians in the United States, oppose Mexican imports in significant part because of much lower Mexican labor costs (e.g., at General Motors’ Mexican plants workers reportedly earn $25 per day compared to $18-$32 per hour in the United States. (Auto worker wages)  U.S. unions, which have opposed freer trade for decades, support higher tariffs on autos and auto parts imported from Mexico and Canada. (Union support for tariffs) Consequently, while server production can at least narrow or bridge the gap in the overall value of Mexican exports to the United States, it will probably not have a major impact on longer-term unemployment in the Mexican auto industry.

Risks for Mexico

The likelihood that the Trump administration would limit Mexican-sourced server imports seems low, given the importance of major AI enterprises such as Meta, Microsoft, Google, OpenAI and Nvidia to the administration and to the American economy. (AI providers' power)  However, it is not out of the question given U.S. concerns with the increasing trade deficit with Mexico and Mexican reliance on third-country inputs. U.S. actions detrimental to Mexican electronics exports, rational or not, could occur because of their continued reliance on parts and components imported from China and other Asian countries. (trade circumvention actions)

Another risk in my view is a decline in U.S. demand, either because of the bursting of an AI "bubble" warned against by some observers, or simply a decrease in demand in future years as new data centers are no longer being built. (AI Bubble) It is difficult to assess the chances of a bubble because of overbuilding, but overall, the installation of new AI data centers in the United States seems more likely to continue increasing than decreasing in the foreseeable future. It has been suggested that the AI facilities buildup “is the largest scale infrastructure build-out in the history of humanity,” compared in scope to the railroads in the 1800s and Roosevelt’s New Deal in the 1930s. AI investment in infrastructure is forecast to increase globally from $318 billion in 2025 to over $1 trillion in 2029. (AI Build-out)

Still, a temporary slowdown in U.S. AI data center construction could occur because of two factors. First, growing citizen opposition, reflecting NIMBY along with rising consumer electric bills and high center water usage, has led to moratoriums on new construction. New York was recently the first state to order a state-wide one-year construction moratorium. (Data Center Moratoriums) Secondly, it has also been predicted that data center power demand will increase from 31 GW in 2025 to 66 GW in 2027. (Data Center power demands)

Increasing AI server demand may also occur because of continuing upgrading of servers, for example to reduce electric power requirements or speed up computing operations. Thus, the situation is again quite different from the mature automotive industry, where US demand for new cars and small trucks is relatively stable at 15-17 million in recent years (rather than increasing), despite a small decline 2026 over 2025. (U.S. new car sales)

Any of these scenarios for future AI data server demand could have a negative impact on all players in the AI industry in the United States and on suppliers of the servers as well as the chips and other components. The impact on Mexico's exports could be material. The risk suggests that it is urgent for the Mexican government, working with Taiwanese investors, to take steps once again to try to develop a broader group of Mexican-based components suppliers, which presumably could supply electronic parts and components not only to server producers but to other producers of electronic products in Mexico. The fact that Taiwanese companies are investing in other electronic sectors, encouraging a "strategic axis in advanced manufacturing" between the two countries, is a positive factor for Mexico's economy. (https://mexicobusiness.news/trade-and-investment/news/mexico-taiwan-deepen-strategic-axis-advanced-manufacturing) This not only results in technology transfer and job creation, but provides an important alternative to mainland Chinese investment that is no longer politically feasible. (Mexico's China Problem)

Conclusions and Recommendations

The boom in AI server production and exports is not a solution to Mexico’s job losses because of Mr. Trump’s trade policies, even though it may replace much of the export revenue lost in the automotive sector. However, in my view it presents Mexico with a golden opportunity to move a large segment of Mexican manufacturing up the supply chain. As noted earlier, only 3-7% of the value of the AI data servers represents Mexican inputs; the rest are Taiwanese, Chinese, other Asian, or American. No one expects Mexico to become a manufacturer of chips in the foreseeable future; Mexico lacks the engineering talent and legal stability among other factors. Still, Taiwanese companies, working with the Mexican government, could in time raise the Mexican content of the servers, perhaps significantly if they believe the investment climate is sufficiently favorable. Mexico could also strongly encourage Taiwanese producers in Mexico to source their server chips from the United States rather than Taiwan or elsewhere in Asia, to the extent feasible. In this respect at least, American, and Mexican objectives are consistent: it is in the United States’ as well as Mexico’s interests to continue to encourage increased AI chip production in the United States, whether for use in AI servers or otherwise.

Whether the Sheinbaum administration has the willingness and the political ability to improve the business climate to the point where substantial additional direct foreign investment in component production, from Taiwan and elsewhere, occurs is problematic. In the view of some observers, President Sheinbaum’s predecessor, Andres Manuel Lopez Obrador, squandered many of the potential benefits of the nearshoring boom that began in 2017 or before by actively discouraging new direct foreign investment, particularly in the energy sectors. (Undermining Mexico's Favorable Investment Climate) After nearly two years as president, Sheinbaum in my view has mostly made things worse, replacing Mexico’s appointed judges with popularly elected ones, emasculating Mexico’s independent regulatory agencies, and accelerating Mexico’s movement toward becoming a one-party state, as it was before 2000. (Single-Party governance) Thus one can hope but not really expect the current Mexican government to be proactive in improving the investment climate, in this instance giving the AI server industry no viable alternative to importing most of the components from outside Mexico, as is the case today.

The data provided in monthly BEA trade data releases only goes back two years, so to get a four year comparison, I took the releases for June 2026 and June 2024 and then integrated the data from Exhibit 7: U.S. Exports of Goods by End-Use Category and Commodity in each release to create the table at the bottom of this post – scroll down to see it. An Excel spreadsheet I created with the data is here.

Note that the figures are nominal rather than inflation-adjusted. Given the relatively high levels of inflation in recent years, I should probably adjust them to give a clearer picture of things, but I was feeling a bit lazy (and formatting the table to display it here was a pain and took some time!). So take that into account. Next time I come back to this I'll do the adjustment.

Here are the highlights of what I see:

• Agriculture exports are up slightly, with corn and nuts accounting for most of the increase, and soybeans now almost back to 2023 levels. (China has stepped up its soybean purchases, so that might explain things there. On corn, an article from March says Japan, South Korea, Mexico, Taiwan, and Spain are responsible for most of the increase in corn exports. U.S. corn production was up a lot in 2025, so maybe that's part of the explanation for this one.)
• Industrial supply exports are up, but that is mostly due to oil/natural gas (presumably because of higher prices) and non-monetary gold (which, as I noted in my earlier post, seems to mainly be about people looking for safe investment assets).
• Capital goods exports are up, with aircraft/engines and computers/semiconductors driving the numbers. The latter may be due to the general AI infrastructure boom.
• Automobile exports are continuing their downward trend.
• Consumer goods are also down slightly.
• "Other goods" are up but I don't have a sense of what this is about.

Here's the table (which is broken up into multiple images because I couldn't get it all in one image):

U.S. Exports of Goods by End-Use Category and Commodity (in millions of dollars), January - June, by year 2023-2026

The concept of transshipment is far from new. For decades under U.S. unfair trade laws, interested domestic parties could bring a "circumvention" action when goods effectively originating in a country subject to an outstanding antidumping or countervailing order were routed goods through third countries. (Such laws may be used by the administration as a legal basis for its transshipment efforts.) (Legal Basis) The Trump Administration also proposed an anti-circumvention rule in July 2025, which apparently was never implemented.

Circumvention occurs where there is minimal local value added in the third country. (19 U.S.C. § 1677)  A recent (2023) example related to solar panels originating in China. Soon after the U.S. AD/CVD orders against China were published, shipments of solar panels from Malaysia, Thailand, Vietnam, and Cambodia to the United States greatly increased in volume. The U.S. domestic solar panel industry filed an anti-circumvention action. Ultimately, the Department of Commerce concluded, because of the low valued added in the intermediate countries and the heavy dependence on Chinese-source components, that the orders were being circumvented. With several delays not relevant here the solar panels from Vietnam and the other three countries were made subject to the tariff rates that would have been applied if the panels had been shipped directly from China. (Final Scope Determination)

The Navarro transshipment tariffs, if applied, differ from past circumvention actions in two critical ways. First, their application would not be limited to goods subject to an outstanding U.S. antidumping, countervailing duty or other order. Secondly, instead of limiting the actions to specific goods from a given country or countries, the anti-transshipment actions could apply to more than 40 countries, not only low labor cost nations such as Mexico, India, Turkey and Vietnam, but to the EU, Canada, Israel, South Korea and Japan. Thus, while the administration’s primary concern is over Chinese efforts to evade U.S. tariffs as the primary instigator of transshipment for duty evasion, the threatened new chapter in America's trade war with the world would cut a much wider swath.

Implementing a broad transshipment policy could be difficult politically as well as legally. The likelihood of broader retaliation against higher tariffs from former friends and allies (particularly the EU and Canada) beyond current very limited levels exists. Although China as the transshipment initiator rather than one of the intermediate countries is not a direct target, the economic interests of the Chinese government and hundreds of Chinese enterprises could be directly harmed. Under such circumstances it would be naive to assume that China would not retaliate with its own pressure points such as restrictions on rare earth minerals, reduction of agricultural purchases from the United States agribusiness, and import restrictions.

Other downsides are obvious. The restrictions would inevitably be inflationary, raising both finished product and supply chain costs for both U.S. businesses and consumers. The administrative burdens, including new record-keeping, would be substantial, particularly for small and medium-sized enterprises and on Customs and Border Protection, even once the new AI-enabled “Detective Border” mechanism proposed under the White House report were perfected. Some important products could at least temporarily be unavailable in the United States. The uncertainties created as of August 14 as to how the Navarro proposals will be implemented in the real world of exports and imports will add further to those created since April 2025, continuing their chilling impact on new investment and hiring both in the U.S. and elsewhere.

Future tariff treatment of goods traded under the USMCA is also in question. Despite 25%-50% tariffs on aluminum, steel, copper, their derivative goods as well as up to 25% on autos and auto parts, 80%-85% of Mexican and Canadian goods meeting USMCA rules of origin currently enter the U.S. duty free.(U.S. Tariff rates)  (This may change August 19 if Mr. Trump proceeds with his threat to impose 50% tariffs on about $20 billion worth of USMCA-compliant products entering from Canada.) (New Tariffs on Canada) Given the number of Mexican exports to the U.S. that rely on some parts and components from outside North America that still meet USMCA rules of origin, there is no guarantee that such goods will continue to enter duty free, even if legally eligible to do. The same applies to goods imported from Canada and under the United States-Korea FTA and other U.S. FTAs with more than a dozen other countries. (U.S. FTAs)

None of these comments should be interpreted as advocating against reasonable, well-targeted new rules against transshipment. Transshipment has been a recurring problem with China not only in solar panels but for the United States and many other countries with steel, autos and other commodities such as some consumer electronic devices, clothing, and textiles. The departure by the Trump administration from U.S. most-favored nation tariffs averaging around 3% and FTA tariffs normally set at zero in favor of widely differing tariff rates applicable almost on a country-by-country basis seem likely in my view to have exacerbated the urgency for enterprises to seek lower tariff rates, and not only by China. Estimates of annual U.S. tariff losses according to Dr. Navarro’s data range from $18 billion to $136 billion.

However, it can be argued that the U.S. administration should follow a more focused approach, prioritizing goods that have national security implications and/or could realistically be produced in the United States. It would be sensible to negotiate initially with a few suspected major transshipping destinations, such as Vietnam, India, and Mexico. It is difficult to see how Dr. Navarro's anticipated broad-brush approach will work out well for the United States and major trading partners. As Dr. Navarro well understands, transshipping is a problem primarily created by China, with an assist from the U.S. administration’s tariff policies (including but not limited to the widely varying levels applicable to China) and pressures from both Trump and Biden administrations to delink production destined for the United States from China.. Unfortunately, for legitimate economic, political, and national security reasons the United States cannot hold China accountable for fear of risking damaging retaliation, as noted earlier.

Finally, as the paper is authored by Dr. Navarro, probably the administration's most doctrinaire protectionist, it will be surprising to some observers if the applicable rules are designed to address legitimate transshipping concerns rather than as another (probably futile) attempt to reduce the U.S. trade deficit, generate high volumes of tariff revenue, or encourage U.S. manufacturing and job creation. Rather, the policy is as much or more likely to increase costs of imports for many if not most American importers and consumers. Unfortunately, expanding Mr. Trump's tariff war with the rest of the world may well be considered by some to be an additional fringe benefit in itself, as will be the rush by well-connected foreign producers and importers to obtain exceptions.

Derby Clerfe purchased handguns in the United States and smuggled them to the Republic of Haiti in violation of numerous federal laws. He was indicted for and later pleaded guilty to one count of conspiring to violate federal laws that prohibit exporting firearms without filing an export information in violation of 18 U.S.C. § 371. ...

...

Clerfe ... argues that the various laws prohibiting the export of firearms without filing an export information violate his Second Amendment rights. ...

...

We agree with the government that "keep[ing] and bear[ing[] Arms" does not encompass sending them abroad in violation of arms-trafficking laws.

We begin with Heller, which explicated the meaning of the phrases "keep arms" and "bear arms." Looking to founding-era dictionaries and treatises, the Supreme Court concluded that "the most natural reading of 'keep Arms' in the Second Amendment is to 'have weapons.'" … By comparison, Clerfe's conduct—exporting arms abroad—involved dispossessing himself of firearms. ...

...

As a fallback, Clerfe argues that even if exporting arms abroad does not count as "keep[ing] Arms," his conduct is covered by the plain text because the Second Amendment prohibits all "infringe[ments]," which he reads to mean anything that hinders the right. He suggests that "even the smallest burden" hinders the right. Clerfe relatedly points to pre-Bruen caselaw recognizing that the Second Amendment right, like other rights, "implicitly protect[s] those closely related acts necessary to [its] exercise." We agree with those authorities. But Clerfe's argument is tautological: His right to "keep Arms" was not "infringed" for the same reason that exporting arms abroad is not protected by the right to "keep Arms" in the first place….

Finally, Clerfe cites to this Court's pre-Bruen caselaw stating that "[c]ommercial regulations on the sale of firearms do not fall outside the scope of the Second Amendment." Clerfe stretches that language much too far. The explicit lesson of those cases is that it matters whether a commercial regulation impinges upon the "right to possess and carry weapons in case of confrontation." After all, "[i]f there were somehow a categorical exception for these restrictions, it would follow that there would be no constitutional defect in prohibiting the commercial sale of firearms. Such a result would be untenable." …

Put differently, a commercial regulation cannot end-run the "individual right to possess and carry weapons," but if the regulation does nothing to "infringe[]" upon that right, the Second Amendment is not implicated. Because the laws that prohibit Clerfe from exporting handguns to Haiti do not limit his right to "keep and bear Arms," the plain text of the Second Amendment does not protect the conduct at issue….

Even assuming the Second Amendment covers Clerfe's conduct, the government has shown that the challenged laws prohibiting the export of weapons abroad are "consistent with the Nation's historical tradition of firearm regulation." Since the founding of the Republic to the present day, Congress has restricted the exportation of weapons abroad. In 1794, just three years after the Second Amendment was adopted, the Third Congress passed a law titled "An Act prohibiting for a limited time the Exportation of Arms and Ammunition, and encouraging the Importation of the same." That statute made it unlawful "to export from the United States any cannon, muskets, pistols, bayonets, swords, cutlasses, musket balls, lead, bombs, grenados, gunpowder," etc.

Likewise, the Ninth Congress "suspend[ed] the commercial intercourse between the United States, and certain parts of the island of St. Domingo"—modern-day Haiti. And the Tenth Congress for its part promulgated the Embargo Act of 1807 which prohibited the export of all goods, including firearms, from the United States. The Congresses that enacted these laws included John Adams, Oliver Ellsworth, Rufus King, Albert Gallatin, Robert Morris, James Monroe, Joseph Story, Jonathan Trumbull, James Madison, Henry Clay, John Quincy Adams, and others who knew a thing or two about the Constitution.

Clerfe resists these historical analogues, arguing that they, especially the 1794 law, addressed different societal problems and imposed different burdens. He claims that the 1794 law had nothing to do with the foreign-policy concerns that motivate modern-day arms export regulations. Though the 1794 law, titled "An Act prohibiting for a limited time the Exportation of Arms and Ammunition, and encouraging the Importation of the same" seems to have been enacted, in part, to increase the domestic stock of firearms, it strains credulity to think that foreign-policy considerations were not also relevant. But even spotting Clerfe that difference, other generally applicable founding-era export controls addressed the same sort of foreign-policy consideration. ...

Up to the early 1900s, the U.S. did not have an income tax, and tariffs were one of the primary means of raising money for the U.S. Treasury. And because this is not something that was true in the lifetimes of most Americans, we have gotten used to not thinking about it, or thinking about it as an illegitimate use for tariffs. And that the legitimate uses for tariffs are ... related to national security or to protection of specific industries and jobs. But in fact, our predecessors very much saw tariffs as a perfectly legitimate revenue-raising strategy. ...

So my contention is that in the current moment, because of the changes to our tax structure and the skyrocketing levels of our deficit, it's going to be very hard for any future president from any political party to forego revenue. So we shouldn't expect a complete and instant rollback because that's a political leader giving up revenue, which they're just not going to do. So that's point 1.

Point 2 is ... that we've seen from the Trump tariffs that there are some industries and sectors that perceive that they have benefited, and it's very hard, and again politically challenging, to pull that back.

I see her points here and there is some logic to them. However, on the issue of giving up revenue in the midst of high budget deficits, I think it's worth noting that the Trump tariffs have coincided with a period of well above average budget deficits. As the first Section 232/301 tariffs were being imposed under Trump, the budget deficit started increasing, and the trend of both higher tariffs and higher budget deficits has continued since then.

In addition, Heather takes us back to the early 1900s and before, when tariff revenue played a bigger role. But given the size of the federal government today, there's no level at which tariffs can be set that will make more than a modest dent in the deficit/debt.

All of this suggests that high tariffs are not an effective way of addressing budget deficits or the debt, and what we need with U.S. fiscal policy at the moment is a broader rethink of tax revenues and spending. Tariff revenues may not be totally irrelevant here, but they are a somewhat marginal component of the discussion.

Even if I'm right about all this in an objective sense, though, how will things play out in political debates? What will future legislators and executive branch officials think? And what will the voters want here (to the extent we can figure that out)?

My points above should be fairly easy to communicate with simple charts showing the tariff increases along with the rising budget deficit and debt, so I'm hopeful this can work politically for a future president who may be interested in pursuing the removal of these tariffs. As noted, tariff revenue is simply not the main factor in dealing with budget deficits/debt, and the focus of the tariff debate should be on the broader impact of the tariffs on the economy and on relations with other countries (which, in my view, hasn't been great so far).

With regard to Heather's point about whether any changes can be "instant," it is true that tariff removal on the proverbial "day 1" of the presidency might be difficult. There are processes that need to be followed under tariff provisions such as Section 301, and if a future administration were making an effort to follow the rules when removing tariffs, it might want to be sure everything was done properly. Nevertheless, if the administration were inclined to go in that direction, it could probably do things pretty quickly.

As to "complete" removal, this could be tough because of the China element. Politically speaking, removal of China-specific tariffs will be a challenge. Someone will have to come up with a coherent alternative policy in relation to China in order to get those tariffs removed (this can be done, but it won't be easy). However, I would think most of the non-China Trump tariffs could be rolled back over time. Yes, as Heather notes, there are special interests who have benefitted and will want to keep them in place. But if you'll permit me a bit of wishful thinking, we may be at a moment where people are fed up with the government catering to special interests.

Of course, subsidies aren't the only factor suppressing Chinese consumption, according to this view. Michael Pettis, with whom I sometimes spar over these issues, recently listed the following domestic policy areas in which China could make policy changes in order to achieve greater domestic consumption (subsidies are at the end of the list):

· Faster wage growth transfers income from employers to workers.

· Larger social transfers shift income from the state to retirees and the poor.

· Lower income taxes or consumption taxes increase the GDP share of household disposable income.

· Pro-union legislation, or the elimination of residency restrictions, transfers income from employers to workers.

· Stricter environmental protection transfers income from industrial polluters to local households.

· Reducing subsidies to manufacturing, infrastructure, or favored borrowers shifts resources away from producers and toward households.

After presenting this list, he stated: "Although these policies appear very different, they all accomplish a similar macroeconomic objective: raising the household share of GDP while reducing the producer share, thereby reducing the excess saving that ultimately manifests itself as current account surpluses."

Just to state clearly what I think will be obvious to trade policy experts, there is an important difference between industrial subsidies and the other items on the list: For subsidies, when China joined the WTO it agreed to abide by the obligations of the SCM Agreement and its Accession Protocol, whereas China did not sign on to an international agreement for the other items. As a result, there isn't much scope for governments to press China on the other issues. Obviously, any government can raise whatever issue it wants with any other government. But I'm not sure the Chinese government is going to pay much attention to what foreign governments have to say on these other issues. (I doubt the U.S. government would take action if it were pressed by other governments on all this). I suppose the idea is to impose some sort of sanction in order to pressure China, but I'm skeptical that China would respond positively to that.

By contrast, because China did sign on to an international agreement on subsidies, there is a clear avenue for others to exert pressure in a constructive way. China's record on compliance with adverse WTO dispute settlement decisions is decent, so why not try to enforce the rules on subsidies? The arguments I've heard against bringing WTO complaints here are not very persuasive. Yes, these complaints can take a while, but (1) if the complaints had been brought back in 2018 when the conversation around these issues picked up, we could have made a great deal of progress already and (2) if we don't start the complaints now, we could still be talking about all the same things in 2034. And the alternative approaches that have been used in the meantime haven't gotten us anywhere.

Turning to "the need to strengthen household consumption" (as Pettis puts it), while I think that Chinese government subsidies and other non-market practices are a real problem, the broader logic tying producer subsidies to household consumption is not as convincing. It's certainly possible that consumption would rise if Chinese government subsidies to producers were reined in, but the actual consumption outcomes depend on what exactly is done with the money previously given to producers. Would consumption go up a bit if the Chinese government transferred more money to retirees and the poor? Probably. But it's worth emphasizing that the debate over transfers to retirees and the poor happens everywhere, and is a very sensitive one in domestic politics. It's difficult to influence how other governments approach this, and my sense is that the views of the Chinese government about these policies are firm and not easily changed.

But that doesn't mean people should ignore the subsidies. While reducing subsidies to industry may or may not translate into much greater consumer spending, these subsidies do have a real impact on trade flows. As part of the effort to create a level playing field, it makes sense to enforce the rules on subsidies that every government agreed to. Thus, other governments should press China on complying with WTO rules on subsidies (and the behavior of state-owned enterprises as well). This shouldn't be particularly controversial, as it just means enforcing the international rules in this area. While there's no guarantee of a big payoff in terms of increased Chinese consumption as a result, it would help make everyone feel like the trading system is operating under terms that are fair.

The latest idea in this space is @BernieSanders' proposal to deposit 50% of the shares of leading AI companies into a new sovereign wealth fund.

While it could mean $$, the bigger reason to consider this is greater democratic control over our era's most disruptive technology.

I wasn't looking to engage on the merits of public equity in general (I'm against it!), but the international aspects of the AI part of his argument intrigued me, so I asked him whether his argument for public equity here applied only to the U.S. government or to other governments as well:

With regard to AI companies in particular, is your argument that the US government should take equity stakes in domestic AI companies, but no other government should do this? Or do you think other governments should also adopt this policy and take equity stakes in domestic AI companies?

His replied as follows:

Any country could certainly demand this of any AI company as a condition for operating domestically.

But a sustainable policy regime internationally (which we do not even attempt to get into) would probably involve some type of exclusivity or "apportionment" where home countries get more of a claim.

I followed up with a question about whether his suggestion might lead to some economic nationalism for people choosing between AI companies:

Do you think such a policy regime is likely to lead to some degree of national boundaries for AI, under which citizens of a country use the services of national AI companies because they (1) share in the profit from these companies & (2) have more trust in the way these companies handle their data?

And he answered:

Possibly. But I think we're already seeing some degree of that desire, even without the policy.

Todd and I disagree on a lot in terms of what economic policy should look like, but sometimes we agree on what things do look like, and here I think he's right about what we are seeing at the moment. There is a growing awareness of the ties between the leading tech companies and the governments of the countries where they are based, including how governments can access consumer data and how they can exert control over who uses the products/services. It seems to me that an absence of trust in these governments is likely to intensify the push for homegrown alternatives. (In the U.S., the main concern is China. In other parts of the world, there is growing concern about the U.S. as well.)

Tech sovereignty vs. concerns with specific governments

This is playing out in the policy debate as "tech sovereignty," with some companies pitching their services as having a national orientation, which they hope will make them more trustworthy for the citizens of the nation(s) where they are based. I've seen this in the social media world with both Canadian and EU companies taking this approach.

But the situation goes beyond pure nationalism. In addition to a call to use domestic providers of services, there can be a broader pitch to consumers that is more directly focused on privacy and other guarantees, as well as an assurance that use won't be cut off by the government where the company is located. Many consumers will prefer to use products/services for which they can trust the government that is setting the rules. Having data and operations hosted in particular countries can therefore be a selling point to consumers around the world.

While I think Todd is right that all of this is happening already, I would say that a shift to public ownership could further stimulate this trend. For example, Europeans who are currently worried about using OpenAI's ChatGPT – e.g., for privacy reasons or a fear of becoming dependent on ChatGPT and the U.S. government then cutting them off – would likely be even more concerned if the U.S. government owned shares in OpenAI.

These issues will have an impact on the international competition among AI companies, a key theme of which today is the U.S.-China competition to "win" the AI race. While it will be interesting to see which country's industry will have the most advanced AI, I think that is only part of the race that's happening here. Currently, U.S. AI companies have the most capable models, but it seems likely that eventually we will get to a point where the basic models can do everything most people want or need, and the advantage held by the leading models will be less noticeable and valuable. Anthropic's Claude may be the best, but for the average person second or third best will be more than enough. At that point, the choice of model for many people is likely to be based on factors such as trust in the company (and cost, of course), with trust linked to the country in which the company is located and the policies/regulations that are in place there. And public ownership of the company would likely play a role in the level of trust as well.

Public ownership vs. regulation of the AI sector

As to Todd's main point, I'm not sure public ownership necessarily means "greater democratic control." Certainly it means strong bureaucratic oversight, but I don't think that's the same thing. A small number of experts working in government who make decisions on complicated technical issues without much transparency is not necessarily the democratic ideal. A key question here is, greater democratic control as compared to what? Would public ownership be better than detailed and comprehensive legislation and regulation of private companies?

To me, what is needed here is a sensible version of the latter. But the companies don't want that, and I'm not sure legislators and regulators are able to provide it at the moment. At some point they will figure it out, but it may take a crisis or two to get us there. In the meantime, there is plenty of room for experimentation among governments around the world, and hopefully some of them can move things forward a bit.

As is probably obvious to this blog's readers from 20 years of me posting, in many areas I'm a skeptic on regulation. But here the potential harms are wide ranging, and we are likely to need something pretty extensive. AI regulation will have to address a much broader set of concerns than, say, automobile regulations do (of course, we now have to deal with AI in automobiles!). From what I can tell, the industry doesn't seem like it has a handle on this, so it's going to be up to legislators and regulators. Perhaps the courts can help too (a suggestion I recently came across for applying strict liability here was interesting), and there is plenty of litigation going on, but it would be nice to have a coherent policy rather than a hodgepodge arising from court rulings.

My own experience with AI is still pretty limited, so what do I know?!

As for me personally, since I last posted about this, I've actually used AI tools for a couple tasks: Trying to figure out some problems with our website code and coming up with a market value for a house. It seemed moderately useful for those tasks, although with the website problems it took a developer looking deep inside the code to get things working again. (I should note, though, that at one point the developer was using AI to help diagnose the problem, so I shouldn't totally dismiss AI in that case).

With regard to law/policy thinking and writing, I've heard people say they use AI for research or brainstorming or drafting. I'm never going to use it for any of those tasks because they are things I enjoy doing the way I do them now. Perhaps AI will someday be able to eat pepperoni pizza for me, but that's an experience I want to keep enjoying and I'm never going to let AI eat my pizza! I feel the same way about my current process for thinking and writing.

But I can see how someone might not always want to do one or more aspects of these tasks, and how outsourcing that to AI might make sense. For that reason, I'm not an AI-denialist. I see the value, although I think it is perhaps overstated. In addition, I suspect that when people have to pay the actual costs of AI tools instead of getting them at the current subsidized price being offered by the AI companies, things might shift a bit. And there are big copyright issues still to be dealt with here, which could change what AI companies can offer. For these and other reasons, I'm happy to stay mostly on the sidelines for now and let the companies and governments work out what AI will turn out to be.

“I had to store my friend’s dead body in the freezer.” A fisher shared this with me and my colleagues at the Office of the U.S. Trade Representative (USTR) through an interpreter. “Every time I opened it to store the catch, I saw his body until we finally reached shore.” His friend had worked extreme hours for months under abusive conditions, without a single port of call. When he fell ill, he did not receive the medical treatment he needed. The vessel never diverted for his care, or to bring his body home. It kept to its schedule. 

What the fisher described was forced labor as defined by the International Labor Organization (ILO) Convention 29 on Forced Labor, 1930: 

“all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily.”

The fisher was part of a delegation of forced labor survivors from distant-water fishing vessels that a labor rights organization accompanied to Washington, DC, in 2025. They were brought to the agency to meet with us, tell their stories, and offer solutions for preventing forced labor. The fishers understood that trade enforcement done right could protect workers like them.  

Trade policy can be a force for good in workers’ lives. I know because I spent 25 years as a senior government official advancing labor rights at the intersection of trade and labor, including combating child labor and forced labor. As deputy assistant U.S. trade representative for labor affairs, I led the global forced labor portfolio before my retirement from federal service.

I carried that portfolio under Ambassador Katherine Tai’s worker-centered trade policy. It was a policy built on years of advocacy by the labor and anti-trafficking community to link trade and labor rights. Under her leadership, we secured the first G7 Trade Ministers’ Statement on Forced Labor and the only U.S. government trade strategy on forced labor. Under Ambassador Jamieson Greer, I helped negotiate forced labor protections into Agreements on Reciprocal Trade, which trading partners signed to secure relief from tariffs imposed under the International Emergency Economic Powers Act. I watched him hold the line on labor rights provisions. I was still at USTR when the pivot to Section 301 of the Trade Act of 1974 took place earlier this year, but left before that work went further. 

Pretext or Principle?

You did not need to be on the inside to know forced labor was not the real problem driving the 301 tariffs, levied on 60 economies, made effective July 24. After the Supreme Court struck down the “Liberation Day” tariffs in February, temporary tariffs under Section 122 served as a stopgap measure lasting 150 days. Those Section 122 duties were set to expire on the same day that Section 301 emerged as the replacement tool for the same set of tariffs. Unfair trade practices related to “failure to impose and effectively enforce” a forced labor import ban (“import ban”) became the new legal justification. 

Worker organizations have long called for Section 301 to address labor rights as an unfair trade practice. Congress made denial of worker rights an actionable unfair trade practice in 1988. The AFL-CIO filed Section 301 petitions against China in 2004 and 2006. USTR declined to accept either petition. It is not surprising, then, that many beyond labor advocates see the use of Section 301 as pretext. They watched the sequence of tariff justifications unfold in real time. 

The USTR fact sheet claims President Trump is “tackling modern-day slavery at its source.” In one sense, that is defensible. USTR is requiring trading partners to block goods made with forced labor. In another sense, it is disingenuous. USTR’s tariffs are designed to incentivize a government to “impose and effectively enforce” a forced labor import ban. But according to its notice of action, USTR carved out a set of exemptions. Among those exemptions, USTR will forgo tariff leverage if the product cannot be “grown or produced in sufficient quantities or at reasonable prices in the United States or obtained from other sources,” regardless of whether tariffing it would pressure a government to act. While not the same, the Section 301 tariff consumptive demand exemption echoes the Section 307 consumptive demand clause, which gutted the Tariff Act of 1930’s forced labor import ban for 85 years until advocates won its repeal in 2015.

Creating a High-Standard Remedy

These tariffs face lawsuits. Whether or not one agrees with these tariffs, the transformation of the forced labor import ban landscape has been swift. Governments are taking action to adopt and enforce forced labor import bans. As of August 5, 2026, 25 governments and the European Union have import bans on the books or on the way, many moving quickly to avoid tariffs. But speed should not supersede a systemic approach to designing these bans. 

Ending forced labor is shared work, and the labor community’s energy and expertise are essential to turn commitments on paper into enforcement in practice. Advocates remember what happens when a well-intentioned trade measure harms the people it was meant to protect. The U.S. Child Labor Deterrence Act of 1992, otherwise known as the “Harkin Bill,” proposed a ban on imports made with child labor. In the fall of 1993, expecting it to pass, the Bangladeshi garment industry dismissed tens of thousands of working children, with documented cases of children ending up in more exploitative conditions. That bill never became law. If these tariffs are to stay in place, they must work for workers. 

If the Section 301 tariffs are to be a credible deterrent, they must incorporate the lessons of the labor community. USTR should insist that governments build those lessons into their own approach. As Martina Vandenberg, President of the Human Trafficking Legal Center, and Ayla Francis Foster, Director for Policy & Government Relations at Humanity United Action, noted in their MS NOW opinion piece, “When forced labor import bans are real, they make it possible to envision a world without any safe harbor for goods tainted with forced labor.” 

USTR should set a high standard for the Section 301 remedy floor with a transparent offramp to zero tariffs and benchmarks that governments can meet. Drawing on U.S. Customs and Border Protection’s Forced Labor Enforcement Operational Guidance for Importers, Laura Murphy’s An International Blueprint for Forced Labor Import Bans, and the ILO Protocol of 2014 to the Forced Labor Convention, 1930, the remedy should, at a minimum, require evidence-based priority targeting of goods, clear and specific evidentiary thresholds, and a public list of implicated entities. It should also fund enforcement and require remediation that corrects labor violations, including back pay, regardless of migration status. Lower rates should go only to economies that recognize U.S. determinations of high-risk goods, act on them, and demonstrate that forced labor goods have been stopped at the border. 

Enforce Existing Trade Authorities

Existing trade authorities to combat forced labor also need consistent and timely enforcement. The Uyghur Forced Labor Prevention Act entity list had remained unchanged since January 2025 until the U.S. Department of Homeland Security added 43 companies on July 31, 2026. The politicization that led to lifting the Section 307 Withhold Release Order blocking Central Romana sugar, as New York Times reporting showed, should never have occurred. Slashed staff and funding for labor rights and anti-trafficking programs that level the playing field for both American workers and those abroad must be restored at the border and at the “source” itself: the recruitment corridors and workplaces where exploitation begins. Reckless disregard for forced labor throughout global supply chains requires consequences at home and abroad. 

This Moment Is for the Labor and Anti-Trafficking Movement

The recent commemoration of World Day Against Trafficking in Persons is a reminder to the labor and anti-trafficking community: claim this moment and make it a win for workers. Many feel sidelined as governments rush out import bans to avoid tariffs, without consulting workers or the advocates who spent years learning what makes them work. That frustration is fair. That said, the cause belongs to the movement that has pushed for decades to protect workers from and through trade. Governments and businesses must be held to account — to protect, to respect, and to remedy — as laid out in the United Nation Guiding Principles on Business and Human Rights. 

For more than a century dating back to the Keating-Owen Child Labor Act of 1916, survivors, workers, organizers, and unions have fought to keep goods made with abusive labor out of American commerce. They marched in the Global March Against Child Labor for the ratification of ILO Convention 182 on the Worst Forms of Child Labor. They filled the streets at the Battle of Seattle in 1999 to demand that trade not ignore working people. They wrote enforceable labor provisions into free trade agreements, including the hard-won Rapid Response Mechanism in the United States-Mexico-Canada trade agreement. They won the passage of the Uyghur Forced Labor Prevention Act. They then took it global, winning their fight to press the European Union to shut its market to forced labor goods. The labor and anti-trafficking movement built the foundation these tariffs rest on. That history is why they should not yield now. 

The stakes are high. Whether on sea or land, workers and children find themselves working involuntarily under coercive conditions. The ILO, Walk Free, and the International Organization for Migration estimate 28 million people are in forced labor on any given day. The worker who died at sea was one of them. The fisher honored his friend’s memory by sharing his testimony with us. We can honor their bravery by demanding these tariffs be used legitimately, and that a remedy be designed for the workers it pledged to protect.

Charita Libao Castro, PhD, MSW, is a former deputy assistant U.S. trade representative for labor affairs, where she served as the global forced labor lead

I had been wondering if this process might provide some new information on the Trump administration's various trade deals, and I've been watching for documents related to the trade policy reviews of governments with whom these deals have been negotiated. Japan's latest review took place at the end of May, and, as I hoped, there were some questions on these issues. Below are the ones I came across that I thought might be of interest to people in relation to the Trump trade deals.

First up were some questions on the details of the U.S.-Japan framework trade deal and its consistency with WTO obligations. On this issue, China asked the following:

During the period under review, Japan reached a trade agreement framework with the United States. When will Japan reduce tariffs for the United States, and will such reductions be implemented on a Most-Favoured-Nation (MFN) basis? When will this framework be notified to the WTO, and will it conflict with Japan's obligations under the WTO?

Japan's reply was:

Under the Agreement between Japan and the United States on July 22, 2025, Japan made no tariff concessions. The Agreement is not legally binding. It is not a regional trade agreement under the WTO Agreement and is not subject to notification.

China later followed up with a question about the nature of the deal as "legally binding" or not:

In its response to the first batch of questions, Japan stated that the framework agreement is not legally binding. Could Japan further clarify the reasons why the agreement is not legally binding? If it carries no legal binding effect, may either party decline to perform its stipulated obligations?

Japan elaborated on the point as follows:

The Agreement between Japan and the United States on July 22, 2025 was not intended to establish legal obligations for either country. Japan intends to steadily implement the Agreement, and will continue to call on the United States to do the same.

Taiwan asked a similar question on the point about consistency with WTO obligations:

Noting the bilateral tariff arrangements between Japan and the United States in 2025, including the application of a baseline 15% reciprocal tariff and preferential treatment under Section 232 measures for certain sectors, could Japan elaborate on how such arrangements are consistent with WTO principles, particularly the most-favoured-nation (MFN) obligation, and how Japan assesses their implications for non-discrimination and predictability in the multilateral trading system?

Japan gave an answer similar to what it said above:

Under the Agreement between Japan and the US on July 22, 2025, Japan made no tariff concessions, and did not commit to implement measures inconsistent with the rules on the market access under the WTO Agreement.

Kazakhstan asked a variation of this question, with some additional aspects thrown in:

Japan's report describes the bilateral tariff agreement concluded with the United States on 22 July 2025, under which a baseline reciprocal tariff rate of 15% applies to Japanese goods. Kazakhstan requests Japan to clarify how this bilateral arrangement is consistent with the Most-Favoured-Nation (MFN) obligation under the WTO Agreement, and what measures Japan is taking to ensure that the agreement does not result in trade diversion to the detriment of other WTO Members, including Central Asian countries exporting comparable goods to the United States market.

Japan's reply focused only on the first part of the question:

Under the Agreement between Japan and the US on July 22, 2025, Japan made no tariff concessions, and did not commit to implement measures inconsistent with the rules on the market access under the WTO Agreement.

Next there were some questions about Japan's market access promises related to automobile regulations and subsidies. For reference here, on the regulations, a White House fact sheet on the U.S.–Japan Strategic Trade and Investment Agreement says: "Longstanding restrictions on U.S. cars and trucks will be lifted, granting U.S. automakers access to the Japanese consumer market; U.S. Automotive standards will be approved in Japan for the first time ever." China asked the following on this issue:

According to the framework trade agreement with the United States, Japan will accept US manufactured passenger vehicles certified under US safety standards without requiring additional domestic testing. Please explain Japan's considerations and grounds for waiving domestic testing requirements on US-manufactured passenger vehicles. Will Japan grant the same exemption treatment to passenger vehicles from other members that meet equivalent safety standards?

Japan's reply was:

The road vehicle safety regulations of Japan apply equally to vehicles imported from all countries without distinction.

The measure has been implemented following an evaluation of the FMVSS and the means by which compliance with such standards is ensured.

And on subsidies, a Joint Statement on the Framework Agreement between the United States and Japan on July 22, 2025, released on September 4, 2025, states that Japan committed to the following: "Providing Clean Energy Vehicle Introduction Promotion Subsidies for American cars." On this issue, China asked:

According to the framework trade agreement with the United States, Japan specifically states that Japan will provide Clean Energy Vehicle Introduction Promotion Subsidies for US manufactured passenger vehicles. Who is eligible for this subsidy, and what are the criteria for receiving it?

Japan replied:

Clean Energy Vehicle Introduction Promotion Subsidies provides financial support to local governments, other organizations (excluding independent administrative agencies), and individuals to cover part of the costs required for introducing clean energy vehicles. As application requirements, the program requires that the vehicle be new and private use, among other conditions.

China followed up by asking:

According to the framework trade agreement with the United States, Japan specifically states that Japan will provide Clean Energy Vehicle Introduction Promotion Subsidies for US manufactured passenger vehicles. Can similar products from other WTO members also receive this subsidy?

Japan then replied:

Only vehicles that are mass-produced and whose specifications or model types have been preapproved by the subsidy implementing organization, based on applications submitted by the manufacturer or equivalent entity, are eligible for Clean Energy Vehicle Introduction Promotion Subsidies Vehicles manufactured in countries other than the United States are also eligible to receive this subsidy.

Next up, there was a historical look at the trade deal signed between Japan and the U.S. during the first Trump administration. Here, China asked:

Could Japan please explain the reasons why the 2020 trade agreement on goods with the United States, together with their related rules of origin, were not notified to the WTO?

Japan replied:

We look forward to notification and discussion, taking into account that the Agreement includes the reference to additional negotiations between the Parties.

Russa also asked about this:

Please clarify whether Japan has already notified the Japan-United States Trade Agreement of December 2019 to the WTO? If this is not the case, please clarify when the missing notification will be provided.

Japan's reply was:

In light of Russia's aggression against Ukraine, Japan does not think it is appropriate to engage with Russia in a business-as-usual manner in the WTO. Therefore, we cannot respond to this question.

And there were questions about the foreign investment commitments Japan recently made to the U.S. in a Memorandum of Understanding. China first asked the following (the question seems to have gotten a little bit garbled in the WTO document, and I'm just quoting it as is):

As the Report by the Secretariat mentioned that "a pledge by Japan to invest up to USD 550 billion into the United States under a dedicated Memorandum of Understanding""The Memorandum is an "administrative understanding" between the two parties and does not create legally binding obligations under domestic or international law. It may be modified or terminated by either party with written notice". Could Japan please explain how Japan consider the implementation of this Memorandum in a new circumstance following the United States Supreme Court ruling in late February 2026?

Japan's reply was:

The Strategic Investment Initiative set forth by the Governments of Japan and the United States contributes to promoting mutual benefits, ensuring economic security, and promoting economic growth between Japan and the United States. Japan intends to steadily implement the Agreement between Japan and the United States, and at the same time, will continue to call on the United States to do the same.

China then followed up with:

As the Report by the Secretariat mentioned that "Investment proposals are selected by the US President (based on recommendations from an Investment Committee chaired by the Secretary of Commerce, with input from a bilateral Consultation Committee.)""Cash flows generated by projects are distributed in two stages. Initially, returns are shared equally, 50% to each party, net of US taxes, until the "Deemed Allocation Amount" is satisfied. Once this threshold is met, distributions shift to a preferential allocation of 90% to the United States and 10% to Japan for all subsequent cash flows.""Japan retains discretion to decline funding, but such decisions trigger consequences: forfeiture of entitlement to distributions under the original allocation formula and application of a revised formula until the United States recovers the shortfall ("Catch-up Amount")". Could Japan please explain how Japan assess the impact of the distribution mechanism on long-term fiscal returns and commercial interests of Japanese investors?

Japan's reply was:

First of all, this description in the Report by the Secretariat is written in the memorandum of understanding (MOU) between the government of Japan and the Government of the United States of America with respect to strategic investments. Regarding funding for each project under the Strategic investment initiative, JBIC (Japan Bank for International Cooperation) will invest and provide loans, and commercial banks will also provide loans guaranteed by NEXI (Nippon Export and Investment Insurance). The MOU also outlines the modality for distributing the available cash flow. Until the aggregate cash flow amounts equal to the principal and the interest funds provided by Japan, 50% to the US and 50% to Japan. This part reflects the fact that loans constitute a significant portion of Japan's funding. For the remaining amount, 90% to the US and 10% to Japan, taking into account various contributions from the US side such as arranging leases for the US federal land, water, and power/energy, as well as facilitating off-take arrangements and expediting regulatory processes. What "long-term fiscal returns" and "commercial interest of Japanese investors" mean seems unclear to us but following the MOU's modality, the principal and the interest funds will be provided appropriately from the available cash flows.

Taiwan also asked about these investment pledges:

With reference to Chapter 5, Section 5.2.2, paragraphs 5.6 and 5.7 of the Japanese report, which state that Japan has committed to promoting USD 550 billion in investment in the United States, with a focus on industries related to economic security, please explain the implications of such outward investment policies for the global investment landscape and the reconfiguration of international supply chains.

Japan replied:

As the paragraph 5.7 of the Japanese report mentions, the purpose of this strategic investment initiative is to build resilient supply chains that benefit both Japan and the US through Japanese investment in the US. Although we are not sure about what 'the reconfiguration of international supply chain' exactly means, we expect these projects under this initiative will strengthen critical supply chains in Japan and the US.

Finally, there were some questions about Japan's promise to buy more U.S. rice. The Joint Statement on the Framework Agreement between the United States and Japan on July 22, 2025 sets out the following commitment: "Expedited implementation of a 75% increase of U.S. rice procurements within the Minimum Access rice scheme." China asked about this as follows:

Whether Japan's unilateral commitment to increase imports of rice from the United States by 75% within the Minimum Access quota violates the GATT principles of Most-Favored-Nation treatment and non-discriminatory treatment for state trading enterprises, thereby reducing export opportunities for rice from other WTO Members to Japan?

Japan replied:

The import of rice under the Minimum Access commitment is conducted through tenders based on the WTO rules, taking into account the needs of domestic consumers, the production and export capacity of exporting countries, and domestic and international supply and demand trends. Import volumes by country are the results of such tenders, and no preferential treatment is given to any specific country.

China also asked:

During the review period, Japan reached a framework trade agreement with the United States, committing to expediting implementation of a 75% increase of US rice procurements within Minimum Access TQs. Could Japan please clarify what is the current quantity of Japan's MA quota allocated to the United States?

Japan replied:

The import of rice under the Minimum Access commitment is conducted through tenders based on the WTO rules, taking into account the needs of domestic consumers, the production and export capacity of exporting countries, and domestic and international supply and demand trends. Import volumes by country are the results of such tenders, and no preferential treatment is given to any specific country.

China also asked:

Japan has committed to increasing rice imports from the United States by 75%. Does this additional volume come from the existing Minimum Access (MA) quota, or has Japan allocated an extra MA quota volume specifically for the United States?

Japan replied:

The import of rice under the Minimum Access commitment is conducted through tenders based on the WTO rules, taking into account the needs of domestic consumers, the production and export capacity of exporting countries, and domestic and international supply and demand trends. Import volumes by country are the results of such tenders; no preferential treatment is given to any specific country, and no extra MA quota volume, has been allocated for the United States.

Another from China:

If Japan's commitment to increase rice imports from the United States by 75% is to be fulfilled within the existing Minimum Access (MA) quota, does that mean the export opportunities for rice from other countries to Japan have been crowded out?

And Japan's reply:

The import of rice under the Minimum Access commitment is conducted through tenders based on the WTO rules, taking into account the needs of domestic consumers, the production and export capacity of exporting countries, and domestic and international supply and demand trends. Import volumes by country are the results of such tenders, and no preferential treatment is given to any specific country. Therefore, export opportunities for rice from any country to Japan have not been crowded out.

One more from China:

The Secretariat report indicates that the import of rice under the Minimum Access commitment is conducted through tenders. Could Japan explain how it ensures that increasing rice imports from the United States by 75% through such procedures will not prejudice the interests of other WTO Members?

Japan's reply:

The import of rice under the Minimum Access commitment is conducted through tenders based on the WTO rules, taking into account the needs of domestic consumers, the production and export capacity of exporting countries, and domestic and international supply and demand trends. Import volumes by country are the results of such tenders, and no preferential treatment is given to any specific country. Therefore, by ensuring export opportunities for any WTO Members, we are not prejudice to their interests.

They start by noting that "the Chinese yuan is no doubt undervalued," but then say "the emphasis on the exchange rate as the lever of adjustment [for imbalances] is misplaced." As set out in a G7 expert report and an IMF policy paper on global imbalances, the yuan-dollar exchange rate is not a culprit but rather an outcome, "an undesirable but predictable consequence of a particular configuration of domestic policies." They explain further that:

A country that suppresses household consumption while simultaneously facing a collapse of property investment will run persistent current-account surpluses and will, other things equal, have a weak currency. A country with insufficient private savings and unsustainably large fiscal deficits will run persistent current-account deficits and will, other things equal, have a strong real exchange rate against other other currencies. The currency is misaligned because the underlying policy mix produces too much or too little saving. The exchange rate is a symptom, not the disease.

Then on the China side, they say:

... [China's] surpluses are real, large and a legitimate concern for the rest of the world, including for a European economy that cannot serve as the absorber of last resort. What China needs to do—and what is in its own long-term interest, given its ageing population and an investment model overly reliant on the tradable sector—is to raise the share of household income in GDP, expand social insurance so that families feel able to spend, and stop financing tradable-sector expansion at the expense of consumption. Do those things, and a real appreciation of the yuan will follow.

And on the U.S. side, they say:

... America will also need to tackle its unsustainable fiscal policy, as well as its persistently low private savings. That, too, cannot be addressed by exchange-rate gimmicks.

They conclude with this:

The G7 and the IMF locate the problem correctly: it lies in the constellation of domestic macroeconomic choices on both sides of the imbalance. A policy package, whereby China pivots to consumption and services-led growth, and America reins in fiscal deficits, is less spectacular than a grand currency bargain. But it has the advantage of being both effective and achievable.

When it comes to getting China to move on issues such as expanded social insurance and higher consumer spending, I have no sense of how to do this. What might the Chinese leadership be willing to do? How can they be nudged in a particular direction? Are Chinese citizens willing to spend more? I'd be interested in what China experts have to say on all this.

On the U.S. side, I feel like I understand the issues better, but it's still not clear how to get anyone to budge. We now have about 5 and a half years of Trump as president, and it's pretty clear that fiscal responsibility is not on his agenda. The question is, what would it take for some future administration to embrace this? It's strange to have to ask this, because from what I can tell fiscal responsibility is somewhat popular. If a presidential candidate were to say "I'm going to cut spending and raise taxes because we need to bring down the budget deficit and reduce the debt," I think that general pronouncement could get decent support. You can't satisfy everyone, of course, and the specific spending and tax adjustments would be a challenge to work out, but I can imagine that at least a small majority would recognize this policy as sensible and support it. Instead, though, we have been getting pro-cyclical, deficit spending stimulus and presidents who are not very popular. There may be a lesson in there for anyone who is willing to learn it.

Getting back to exchange rates, if I understand the authors' main point correctly, they are saying that it doesn't make sense to push for a currency adjustment without also undertaking some changes to domestic policies/consumer behavior, and I think that makes sense. I do wonder, though, what happens if, in practice, you can only get partial changes on the domestic side. I raise this because I think a shift in savings patterns may be hard to achieve, as this could be more cultural than policy-driven. In that case, the exchange rate may need some adjustment, and it would be nice if both countries would be amenable to allowing that to happen.