Boardroom vs. Beijing vs. D.C.: Navigating the New Trade Cold War

Speaker A: Foreign. Understanding is scarce. The Dynamo show goes deep with the new industrialists rejuvenating industry and commerce. Brought to you by Dynamo Ventures. Learn more@dynamo VC podcast. Now, here's your host, Madeline O'. Farrell.

Speaker B: Hi, everybody, and welcome back to the Dynamo Show. I'm your host, Madeline o', Farrell, and I'm excited to be joined today by Drew DeLong, head of corporate statecraft at Kearney. Drew, thanks for being here.

Speaker A: Pleasure to be with you.

Speaker B: Before we dive into your work at Kearney and all that you cover, could you give us a bit of your story and your journey to get here?

Speaker A: Yeah. A story full of twists and turns. The short of it is I was a engineer at Carnegie Mellon that realized about 80% of the way through I didn't want to be an engineer. And I was snowed into a dorm room and watching the first season of House of Cards. And, uh, the curveball there is the season one before anybody started, you know, getting thrown in front of train tracks or anything. But I was really interested in the. You're studying engineering, you're seeing the mechanisms of how things work and the principles underneath it. But then in the show, I was looking at the people mechanisms of how, you know, how Kevin Spacy portrayed it, of how policy got done. And at the time, I didn't know the difference between policy, politics and 20 years old in the dorm room and. But I was really interested in it. I was like, how do these things get done? And Carnegie Mellon had a program in engineering and public policy that looked at the intersection of new engineering technologies and the policies that govern them, that enable them, that help protect against negative externalities of them. I was like, what? What can I do with this? And so I called up a buddy of mine who I knew kind of knew stuff about the political sphere. I was like, I need a summer internship. So I was an intern that summer for, at the time, Congressman Marsha Blackburn in Tennessee, taking phone calls during the first. Well, it was the 2015 Republican presidential primary, which was 20 lively, or the 2016 presidential primary, learning to take very angry phone calls that led into, in January, the first day, the first the Trump administrate, the first Trump administration working for Speaker Paul Ryan in D.C. so I got to see everything from the inauguration to how day one and how Congress reacted to that, was starting to see then really how the system worked. The intersection of the political maneuvering with the policy development. Saw the tax bill, saw the health care bill, the infamous John McCain thumbs down. And then that led into being in the first White House intern class for the, for President Trump and first Admin that led into a myriad of other jobs in the Department of Transportation and the faa. And then my most recent government job was in the Department of State. There's a group called the policy planning Staff which is effectively in house think tank or in house advisory team to the Secretary. And uh, it's the same group that George Kennan led in, in Cold War times. Came up with the containment doctrine, letter X and very much asking big picture questions of you know, what if a conflict happens in East Europe as an example. But I saw what was happening there and I was seeing, saw the early days of some of the actions that the first Trump Admin took with Huawei zte. Some of the early days industrial policy elements. What at the time Undersecretary Keith Kroc was doing with the clean network and Huawei Telecom and. But my dad was 30, 30 years with PepsiCo was always a business executive. I grew up going to, to customer events and I'd always been in the political sector. By childhood I knew I wanted to move there. Got a phone call from smu. My dad had just retired but SMU is like hey, we want somebody with your background. And so I saw the opportunity to leave public sector, go do the whole MBA thing. Went to get my MBA and found a firm called Carney. At the time at CAR and they had a Global Business Policy Council still do. And I was like this is super interesting, this intersection of business and government and how does this all work? Led to an internship, led to me coming into the firm in early 2021 and been here ever since.

Speaker B: Amazing. Well I love the skill of learning how to field angry phone calls. I feel like that will never let you down.

Speaker A: I talked as a 20 year old but it's helped.

Speaker B: Can you tell us a little bit more about Carney? What does corporate statecraft practically entail?

Speaker A: Yeah, so Carney and the team of which I sit within, which is Carney foresight. The short of it is we help clients navigate global uncertainty. And uh, what we found right now and really what everybody is navigating is this new era where persistent elevated volatility is just the norm. And especially in the last 18 months, give or take. But you're now in this environment where there's a reversal of the last four decades where it's been always more efficiency, cost savings really at the trade off of secure supply security. And if you go to D.C. and you sit in any think tank event or any government official is talking, you will hear the phrase economic security is national security. And you'll literally hear it 25 times in a week. And in that environment, companies are now being asked or forced to do things that are a little out of the norm of the last four decades. And so you're hearing questions now around the need for strategic foresight. And you're seeing companies spend records amount in lobbying and upgrading their government affairs capabilities to have a chief government affairs officer that sits in the C suite and all these things. And so Carnegie Foresight does really is help, help clients navigate that end to end. Right. So there's three big pillars. There's the strategic foresight elements or strategic scenario planning development, which is what is in the long term, what does the long term horizon look like? And how can you navigate and identify things that you can take, actions you can take today that actually prepare you as best as possible for multiple horizons? Right. There's a lot of different ways to do scenario planning, but the key is using scenario planning as a tool to identify the set of actions you can take that work regardless of the horizon of which you're going to, you're going to have to operate within. The second pillar, which is the one that I really live and breathe is around uh, policy planning or corporate statecraft, which is as a business you're either going to have to identify, prioritize and respond to these myriad of external forces which are impacting you as a business. Right? Finding out about the latest news, development of what's happening even in D.C. today with the second round of USMCA negotiations between the U.S. and Mexico. What does that mean to the business? What does is coming down the pipeline? What does this mean translating the government affairs into operations, into corporate implications? And what do we need to do now about that? What do we need to potentially hold off and do later? But there's also a dynamic of when can you go on offense? What opportunities sit in this environment that so often this discussion is framed in a risk only context. And if you frame it the other way and you say, well, the government's trying to figure out a Section 232 tariff that impacts our entire sector, this actually can be a benefit to us in a certain way. If it's designed a certain way, if it's architected a certain way, well, let's go talk to them, right? And one of the phrases I use really commonly is that you may not be interested in government, you may not want to be involved, but increasingly they're interested in you. And so you can sit on the sidelines and you can kind of see the roulette will spend and have to navigate it or you can get it more on the front foot. So my team helps do both sides of those. So we've done everything from policy due diligences, which is a little bit of a new style of the old due diligence model to actually policy development and um, helping companies think through that. But it's really the both the offense, the defensive side, what do you do now, what do you do later? What do you have control over versus what do you not have control over at all in the external domain? The third piece of the Carney foresight team is then how do you build this yourself? Right? How do you have a foresight capability within the business that is thinking through these long term implications and finding those actions to take? How do you have a best in class government affairs organization that lets you navigate this going forward? Or in some cases. There's something I've seen pop up a lot more recently is having a geopolitical team. What does that mean? Right? Who does that? How do you get a team for that? What do they do in the business? How do they plug into the business, how do they add value? And that's that third lens. So that's Carney foresight and snapshot.

Speaker B: That tension that you just outlined between kind of the priority of old around efficiency, between the priority of new around resilience, what has really sparked that shift?

Speaker A: Well, it's been a uh, series of events and they're even unfolding today. But the first big shock event where people went, okay, there's some vulnerabilities here is obviously Covid, right at the point when you had fields of cars sitting in Kentucky that because they didn't have a uh, you know, low end, high nanometer chip that was just supply constrained, people went well, why can't we get those right? And everybody who was going to Amazon to get any type of gaming equipment during COVID because we were all locked up and everybody wanted to go, you know, sit inside and have the best gaming system. And all of a sudden you saw gaming prices for things like, you know, Corsair electronics that were, you know, 5, 6, 7x the prices hand up on one of those people. It the consequences of the supply vulnerabilities and the more stark sense of what we saw with, you know, on PPE and not being able to get masks and not being able to get some of the key commodities that people took for granted before. And then all of a sudden it was well, we can't get that? And it was why? And so you started to see some vulnerabilities of what the just in time kind of supply chain configuration led to. You also started to see some of the vulnerabilities of foreign actors taking advantage of some of those just in time pieces. And some of the recent actions that have been taken on the closing the de minimis clause, which effectively allows for expedited delivery tariff or duty free for packages under a certain price and some of the modifications that came after that. Right. And so you saw vulnerabilities, you also saw people taking advantage of some of the structural pieces that were set up before. But then you parlay that into today's environment where now people can't get some of the core commodities that are attached or you know, connected as key inputs into the AI build out. And you know, one of the most pressing issues of today is memory prices. You have memory semiconductors where you have dram, which I don't think the vast majority of industry probably didn't even know what DRAM was. If you weren't, if you were outside the world of tech, you probably didn't know what it was several months ago, maybe a year or two ago. Now you have, I think as of last night there were some headlines about certain tech companies taking really significant price action. We may see the price of iPhone go up considerably as an example. And people were saying, well, why don't we have enough of this? So now we've moved into, from a supply vulnerability with COVID has parlayed into this new environment where you have supply security issues with supply availability as the AI build out prioritizes existing supply. And people are going, well wait a second, I need to make, you know, gaming systems and stuff to go on shelves and medical devices and things that like are not AI build out. And people are just asking fundamental questions of like what? How do we balance this? Right? And as we have now several hundreds of billions of dollars going into this, into the US manufacturing base to scale up domestic semiconductors and domestic manufacturing in select areas. You're asking the question now of well, how do you sustain that? How do you make that cost competitive? How do you have the right balance between secure supply but also cost competitive and self sufficient supply? And that's a really hard equation and everyone's still figuring that out.

Speaker B: I'd love to dig a bit deeper on that self sufficient supply point that you just made. Something interesting that Carney puts out is the reshoring index, right? And we're currently in a moment where there are A variety of tariffs, billions of dollars going into building the manufacturing base here in the U.S. but the data doesn't seem to necessarily show that the US has meaningfully developed its import independence at this point. Right. What is the data in your reshoring index really showing today? And how do you reconcile the gap between maybe policy intent and what's showing up in the numbers so far?

Speaker A: Yeah, well, one I adore the entire author team that led the reshoring index, Patrick Van Den Bosch and the entire team does an amazing job. And every year I really look forward to when it comes out. So to anybody listening to me right now, go to the Carney website, read the reshoring index because it is a great piece of work. The interesting finding this year was that it effectively reshuffled the deck of trade, right where there wasn't a huge drop or shift in US imports, there wasn't a huge boom in reshoring production. And I think there's a couple reasons for that. One is it takes time to move supply chains. That's just the fact of ah, it. And while you know, this administration probably wants them to move faster, they definitely want them to move faster. It takes time. And if you look at some of the import, some of the import data and some of the quarterly results on things like the ppi, what you're seeing is a huge surge in capital equipment that is coming into the U.S. so there's, there is activity, but it does take a while. The second piece to this though is that supply chains can also shuffle within what is immediately under their control. And so as we saw over the last 18 months, US tariff rates went from about give or take 3% up to as high at one point at the most extreme north of 20%. And then it came down and kind of settled at 17. But huge shock to the system, right? And then you had this volatility of the tariff rates moving around from the initial liberation day. Then you had a pause to July. Then you had a second pause for a final negotiation window. You stack on top of that all of the sectoral tariffs that have come out, which then hit everybody. Then you get these deals that are cut which modified down to some pretty. It creates a g. A weird game where if you lay out reciprocal tariff map, you start to see comparative advantages. And one of the stark, one of the really stark examples of this was the gap that existed for a while with the EU and Switzerland where Switzerland was at 39%. The EU deal cut them to 15%. People were there a 24% Delta what are you talking about? And that's just one example. But the same thing is happening in Southeast Asia. So what you have in that second lane is supply shuffling within the countries, within the supply chains that exist. And people are going to take advantage of that. People are going to reshuffle the deck as much as possible to supply chains are going to be efficient, they're going to move to the best possible location. That's just the nature of the game, that's the invisible hand. And the third element which I know is something that is very top of mind of the administration is the whole train shipment issue and combating actors that are may or may not be playing by the rules. And I think this is a tailed case. But in some examples you what the US is really trying to crack down on and we've seen this with now 40% tariff penalty, kind of a trans shipment bad actors list. There continue to be conversations around them, changing rule of origin things to try to combat this. But what they don't want to have happen is if a supplier or you know, an exporter to the US in country X just moving a product, repainting it in country Y and saying, well this is a product for country Y. And so still yet to be seen how much of the of the reshuffle is actually that versus just supply chains evolving. Naturally, I think it's much more the second lane. But in aggregate, I mean this is going to take time for these supply chains to evolve. Without a doubt you are going to see supply chains continue to reshuffle to the most cost advantaged locations in aggregate of everything. You know, we have clients of ours who have set up manufacturing facilities in Southeast Asia and a new geography and what would have taken them years, months. So we've lived this. And then on the third element, the US government is incredibly focused on making sure that the enforcement protocols are in place to clamp down on transshipment violations. And I think it's just going to continue.

Speaker B: Absolutely makes sense. And on those sectoral tariffs, there's been a variety of them. They've been rolled out in different ways to different degrees. What is the way that they've been rolled out? Tell you about where there's real administrative intent to build industrial capacity here domestically versus more of a negotiating tool.

Speaker A: Yeah, well I think it's a little bit of both and I said this a little bit in one of my earlier comments, but there's really two lanes of tariffs, more or less. There's the reciprocal tariff lane which was under IPA. Now it's temporarily under this section 122 band aid, more or less, which is a 10% tariff that goes to July 24th and then what we're already seeing now be architected as a more permanent solution are these Section 301 tariffs. The first, there's two main investigations, one on over capacity, one on forced labor. The first of those we saw, uh, the proposed rates come out couple weeks ago and folks are kind of holding their breath waiting for the second proposed set of actions. But all of those get back to the comparative tariff rate game that I talked a little bit about earlier. The second path is the sectoral tariff one that you mentioned, which is a whole different ball game. Right. And we've seen the line on this really drawn of what are strategic inputs that the US is saying these are strategic for national security purposes, setting a very clear message of it doesn't matter where you're bringing these things in from. Because when these two 32s get activated, they look, operate, feel very similar to steel, aluminum and copper, where these metal tariffs basically say everybody doesn't matter where you're getting it from. This is the rate. Now there's been some modifications to that. We can talk a little bit about how they've reconfigured that. But if you go down the list of the two 32s, the first Trump admin only used it twice. They set up some of the infrastructure to potentially go after automotives in the first time, but they didn't do it. What we've seen this time around is there's a lot more of them, from automotives to critical minerals to semiconductors, which we've kind of seen the first part of. But it was like a mini version. There's going to be a way bigger version coming to timber and lumber and bathroom vanities, which that last one's a little bit of a wild card. Aircraft and aircraft parts. But you also have active investigations right now into medical devices, ppe, medical consumables, robotics and industrial machinery. So you lay out this list and effectively if you are a company who is importing product or the HTS code is on one of those 232 list, but the US government is effectively telling you is you're going to pay a pretty high tariff anywhere you go for that. So this isn't a question of moving from country X to country Y, you're going to pay the piper regardless. And so for a company, they have to do the total landed cost equation of what does this mean? Do we bring this back to the U.S. is there a business case to be able to do that. Do you try to go and take advantage of anything under usmca which so far background context thus far USMCA has been largely the tariff shield which has governed most of North America duty free. There's a little bit of reprieve for autos underneath the auto 232 but for the vast majority of other 232s, even Mexico and Canada don't have a shield on that. And that's a huge point of the negotiations right now. So you look through this list and you say okay, if we're hit by this is something that's pretty permanent. I mean the steel and aluminum tariffs from Trump 1 were kept and modified a little bit under Biden and now really just been expanded under the second Trump term. What do we do now? And so if you find yourself on the 232 side, it's a little bit of a different equation that if you're find your products on the reciprocal tariff lane and then you have a different kind of more global equation that you have to map out.

Speaker B: And what does that equation really look like? Like for a company that's building in manufacturing logistics or energy that might have a decent exposure to a lot of this tariff volatility, how does should they practically think about their capital planning decisions?

Speaker A: Yeah, well one you have to lay out what are all the base conditions right now? Are the known knowns, what are the known unknowns? Really hard to plan on the, the unknown unknowns and having, I mean if you're on the 232 list that has come out, you can pretty much treat that as permanent with some modifications underneath that. We've seen some changes like on the metals tariffs that I described, but a lot more permanence in that domain. But if you're on the reciprocal tariff side then you just have to have the layout map of generally speaking where are these tariff rates going to land? My current base case expectation is that you, you we're going to see an aggregate with all these what are called like art deals or basically reciprocal trade deals what their tariff rates have set. My base case expectation is we're probably going to be back at a February level when you start to add in the uh, India trade deal which is you know, supposedly next week being you know re refinalized with Jameson Greer, the US USTR going to going to India. Nonetheless you have to lay out all these base case expectations. What, what product are we making? We in the 232 path or are we on the Reciprocal tariff path. From there you say, okay, how much? What's the cost of labor, what's the cost of energy, what's the cost of logistics, what's our total l cost of production? When you take in all these other facets, right, what are we looking at here across all of these equations, right, Taking all the cost inputs and you say okay, does this actually move the needle for us? In some sectors, what we've seen is it still doesn't close the cost gap. And so you say, okay, we're going to optimize for the most cost effective way possible. Here on the 232 side you kind of operate uh, on the sense of this is going to be here for a while and treat it with a little bit more permanence. On the reciprocal tariff side you have to really strike the balance one of uh, what markets are you selling to? Right. How important is the US market versus some of these, some other companies who are much more global? Right. How do you strike the right balance between serving the US market and serving global markets? And then what is the right balance in the right cost equation that serves the global markets where you don't have to play as much of a tariff game versus entering the US as cost competitive as possible? And then saying, okay, where are we at? Right, and this really is chess board is probably too simple of an uh, analogy. But like you have to lay out all these pieces and, and run the network analysis to say, okay, where do we find ourselves right now in some cases, especially with some of the pieces that we've seen in automation? And my personal expectation here is I don't think anybody really has considered what we're on the cusp of on the humanoid side. There's going to be some interesting dynamics at play, especially in the US market. And one of the big variables under the cost equation is how much can you actually automate the U.S. u.S. Right. That's going to continue to be, I think, uh, bigger and bigger discussion over the next 24 to 36 months.

Speaker B: And yeah, absolutely makes sense. You know, the conventional wisdom is that China manufactures and America innovates, but you've pushed back on that, particularly as China expands its more sectors like synthetic materials or chips, where they're, they really want to win and not just compete on cost. Where does that trajectory end in your mind? And is there a particular space where there is kind of a strategic imperative that keeps you up at night?

Speaker A: Oh, a lot of parts to that question. Well, I think uh, it's absolutely true that what the initial strategy within China was, which was basically dominate low end manufacturing but now they've moved up the value chain, right. And they are making leaps and bounds in synthetic biology in some of the pharmaceutical innovations. You're seeing them basically do everything they can to continue to innovate and compete and get as far as they possibly can on the semiconductor side. And they're pretty clear about what their plans are, right. If you look at the five year roadmaps that they release, uh, they tell you where they're going. You go back in time to the 90s and they did the same thing on critical minerals, right. And drawing the parallel to saying basically critical minerals is their version of oil. And we've now seen them take that leadership, we've also seen them leverage that leadership. And I think it's going to be more of the same. They're going to continue to say we are going to be proficient in these areas which are strategic imperatives to China and they're going to go compete there and they're going to use their full playbook to be able to do that. On the US side I think what we're seeing now as we talked about some of the earlier questions you asked is we're now asking the question of back to the, your commentary on basically cost versus resiliency. What is that? Right. Equation, right. How do we have our own strategic manufacturing base while continuing to drive and be on the frontier of things like AI innovation, right. With all these frontier labs with data center build outs, with AI infrastructure build outs with all the commodities that feed that. And then there's got another path here which is just strategic industries that aren't really AI, right? Things like automotives, things like, like the metals. I think we're still seeing some of the equation built out globally but certainly us involved I would say on critical minerals and where do things go and how do you have resilient supply chains in that regard. And so I think one of the things I'm m definitely expecting over the next couple years is duplicative stacks where you're going to have select capabilities that are duplicative and that's inefficient for innovation. Right? In, in a world where everybody can specialize their own place and everybody goes then you have maximum innovation where you have duplicative stacks. You are going to get some redundancy. And I, I think that's one of the areas that we're moving into the, on uh, the question of what keeps me up at night in that domain. I think it's a, the wild Card of what is the American industrial policy that wins of. If you look at the history of our industrial policy, we haven't done what we're doing right now really since World War II. And if you draw, try to draw the historical precedence here on some of the actions that have been taken, direct equity stakes, you know, setting price floors list goes on and on. Certainly the export control domain, especially on know, frontier model access by the Commerce Department. I mean, uh, some of these things are new, some of these things rhyme a little bit with history, but have a completely different curveball on them. Now what is the American version? Because there, if you look throughout the globe, there are countries that are really good at industrial policy, right? What you've seen in leadership and the uh, expansion of leadership in select sectors all throughout Asia, right? The precision manufacturing that happens in Germany, the history of industry. If you trace these back and if you think about some of like the RP industries that are out there, and you trace them back to the geographies and say, well, what were the conditions that created that? These government institutions over multiple decades have built their industrial policy muscle. And now the US Is very much in a build the plane as it flies mode that the question is asked, like, what is the American version of this? And whether that is on power permitting, expediting bills, dealing with the supply security elements and dealing with some of the supply crunches that we talked about on AI, figuring out the right balance on the tariff equation to actually solve what they're wanting to do. It doesn't keep me up every single night, but it is one of those questions that is very much, I think, undefined. And then how does the US Government execute against that as best as possible, right? And if you look at how our institutions are set up, you've got USTR, you've got the Commerce Department that owns section 232, you have USTR that owns section 301s. The group that does export controls is two layers underneath the secretary kind of one layer other than the secretary under, uh, in the Commerce Department. There's all these different pieces that are moving around. And so how does the US Government deliver against the American version of industrial policy?

Speaker B: And I don't think there's a better spot for us to end it. Drew, thank you so much for your time. Thank you for your perspective and to our listeners. Thank you as always for tuning in. We'll see you next time.

Speaker A: Thank you for having me. Thanks for listening. If you enjoyed this episode, leave us a five, five star review and tell us what you liked. And be sure to head over to Podcast Dynamo VC to keep up to date with our latest content or subscribe on the podcast platform of your choice. Until next time.