By Eric Vandenbroeck and co-workers

President-elect Donald Trump campaigned on a promise of a trade war more extensive than Americans have seen in decades. His proposals include a new 20 percent “universal” tariff on all foreign imports and hiking tariffs on China to 60 percent. In the six weeks since he won a second term, he has used social media to threaten tariffs against Canada, Mexico, the BRICS—a nine-member bloc of countries founded by Brazil, Russia, India, China, and South Africa—and other targets.

Yet the ultimate contours of Trump’s trade war remain opaque. In a recent television interview, Trump suggested that he sees tariffs as both a tool to expand manufacturing in the United States and as leverage for negotiations with foreign governments. And as Trump moves to turn his trade instincts into policy, he will hear conflicting advice. Fortune 100 CEOs will urge him to use the threat of tariffs to force foreign governments to give their companies better access to markets abroad. Domestic manufacturers and labor leaders will push Trump to follow through on implementing new tariffs to boost U.S. production. National security types will press Trump to strengthen trade with allies as a counterweight to China. Markets, meanwhile, may drop if Wall Street traders think Trump’s tariffs or other trade policies will drive inflation or hurt corporate profits.

Trump’s willingness to be a disruptor gives him the potential to bring about the most significant changes to the international trading order since the current liberal global system arose in the early 1990s. He could reshape trade flows in ways that advance the United States’ geopolitical position and strengthen its industrial base. But Trump’s disruptive nature is also a great source of risk. If he overplays his hand, he may blunder into tariff wars that do little more than hike costs for Americans. Success will require new paradigms for U.S. trade policy and skillful diplomacy, as foreign leaders guard their national interests.

 

Tariff Man

Trump has long seen tariffs as a tool to serve two objectives. The first is rebalancing trade—namely, closing the nearly trillion-dollar U.S. trade deficit and expanding U.S. manufacturing. The second is solving geopolitical problems, whether by threatening to impose tariffs on Mexico if it does not halt the flow of migrants crossing the border or by reducing China’s global economic influence. The president-elect has surrounded himself with people who agree with this approach. Vice President-elect JD Vance argued in July that “a million cheap, knock-off toasters aren’t worth the price of a single American manufacturing job.” Trump’s choice for secretary of state, Marco Rubio, meanwhile, has emerged in recent years as one of Washington’s leading China hawks.

But whether Trump’s goal is to close the trade deficit or to unwind China’s global economic influence, he will find that using tariffs primarily as leverage is more effective than adopting them as policy. Part of the reason is macroeconomic. Broad tariffs would increase costs for American consumers, especially in the short run. Studies suggest that fully implementing the tariffs that Trump threatened during his campaign would cost a typical American family $2,600 to $3,900 per year. Broad tariffs would also have counterintuitive macroeconomic impacts. They would, for example, likely spur the Federal Reserve to keep U.S. interest rates high, which would attract foreign capital to the United States and drive up the value of the dollar relative to other major currencies, partially reducing potential consumer price hikes. But this would hurt U.S. exporters and their employees.

Moreover, history suggests that strategic deals are most effective at reducing the U.S. trade deficit. In the 1980s, the Reagan administration grew concerned about the United States’ rising trade deficit, particularly with Japan. In response, it attempted to erect a host of trade barriers. But the tool that actually brought the deficit down was the 1985 Plaza Accord, through which Washington cajoled major trading partners into helping depreciate the dollar. The accord didn’t fix the bilateral trade deficit with Japan, but it did lead to an 80 percent reduction in the overall U.S. trade deficit by 1991.

Shipping containers at the Port of Los Angeles, October 2024

Likewise, deals will strengthen Washington’s hand in its competition with Beijing. U.S. tariffs on China reduced U.S. imports from the country, but they have not contained Beijing’s global economic ambitions. China’s overall industrial trade surplus has risen sharply since 2018 and now exceeds the peak surpluses of other manufacturing powerhouses, including Japan in the 1980s. Moreover, on its current trajectory, China’s share of global manufacturing will continue to grow: a recent report by the United Nations Industrial Development Organization projected that China will account for 45 percent of global industrial production in 2030, up from six percent in 2000. The U.S. share will have declined from 25 percent to 11 percent.

This is hardly a tenable course for Washington and its allies during a period of geopolitical conflict, so Trump must pivot. He should, in particular, work with foreign countries to reduce their trade with Beijing. Here, Trump should find an increasingly receptive audience. As China’s manufacturing surplus has increased, a growing number of its trade partners outside the United States, including major emerging markets such as Brazil, Chile, and South Africa, have begun to impose tariffs and other protectionist measures of their own. Trump’s task will be to use American trade policy to coordinate and expand those nascent efforts.

Pushing trading partners to raise their own barriers to Chinese products will ultimately boost U.S. manufacturing, as well. Chinese imports to other countries not only displace those countries’ manufacturers but also undercut American workers. U.S.-made products often cannot compete with cheaper Chinese-made products on the international market. And there is evidence that as China increases sales of cars and other high-end products to industrial countries such as South Korea, those countries’ manufacturers respond to the competition by exporting more of their products to the United States—another hit to U.S. manufacturing.

This is not to say that tariffs should only be used as leverage for deals: imposing tariffs on China is an essential part of de-risking the U.S.-Chinese relationship, which is why the Biden administration continued the ones that Trump established in his first term. Targeted tariffs—even on allies—can help promote key strategic industries in which national and economic security requires more domestic production and for which “friend-shoring” is insufficient. And it would be fair for Trump to push for more reciprocity in U.S. trading rates. The maximum tariff rates that Washington committed to maintaining when it joined the World Trade Organization, for example, were about 40 percent lower than the tariff rates Europe agreed to. India’s are several times as high. That may have been acceptable in the early 1990s, when India was a small economy and the United States and Europe were adapting to the post–Cold War era. But it does not make sense in today’s global economy. But Trump and his team will find that both the American economy and American security will generally be better served by striking new deals than by imposing sweeping tariffs on the 85 percent of American trade that comes from countries other than China.

 

Back to the Future

Achieving the results Trump wants will require a set of paradigm shifts for U.S. trade negotiators. This starts with the fact that there is little modern precedent for Washington’s use of trade negotiations to persuade partners to raise tariffs against a third country, especially in a coordinated fashion. For decades, U.S. trade policy has instead sought to reduce barriers to trade—opening foreign markets to American products and offering foreign producers more access to the U.S. market in exchange. When in recent years, the United States has persuaded trade partners to raise barriers to China—such as, for example, the tariffs Canada imposed in October on Chinese electric vehicles and steel—Washington has done so through ad hoc diplomacy rather than as part of formal negotiations.

Under Trump, U.S. officials will need to design trade deals that get partners to reduce their own trade with China. They can start by pressing key trading partners to adopt common external tariffs, alongside the United States, on imports of agreed-on critical products from China, such as vehicles and critical minerals. In exchange, Trump would agree to exempt these partner countries from new tariffs on those targeted imports.

U.S. officials should also change the “rules of origin” that determine what country a product is from for the purposes of calculating tariffs. Current trade rules generally treat products as “made” in the country where they were assembled, overlooking those products’ components. For example, if a piece of wood furniture is made in Vietnam, it is considered Vietnamese, even if the wood came from elsewhere. China can exploit these rules by setting up manufacturing facilities in other countries that rely heavily on Chinese companies and components. Trump should push to change the rules so that such products would be tariffed at Chinese rates. Some of Washington’s partners might be wary of such a shift, but Trump should point out that the rule change will help them by creating an incentive for entire supply chains to diversify away from China.

Trump’s negotiating team will have to make another paradigm shift—one that involves integrating, rather than separating, trade and national security. During the Cold War, the United States and its allies cooperated on trade and security through mechanisms such as the Coordinating Committee for Multilateral Export Controls. But since the Soviet Union collapsed in 1991, U.S. officials have tended to draw a line between the two, arguing that tools of economic statecraft such as export controls and sanctions should not be used to promote trade interests and that tariffs should not be used to promote security interests. In today’s era of intense geopolitical competition, Washington should consider returning to its earlier approach. That means Trump should prod U.S. trade partners to match U.S. rules in areas including export controls and foreign investment screening, especially in regard to China. In exchange, Trump could simplify the export controls and investment screenings that partners face in trading with the United States.

Finally, Washington should start pursuing trade policies that focus less on rules and more on outcomes. For the past 30 years, U.S. policymakers have developed detailed sets of rules to govern the terms of trade. These regulated tariff rates, subsidies, and nontariff barriers—including those applying to food safety, intellectual property, anticorruption policies, currency manipulation, and sectors such as banking. Rules are, of course, important to promoting cross-border trade, investment, innovation, and competition. But the types of measures needed to achieve Trump’s goals require more creativity.

Take the United States’ persistent trade deficit with Germany, which Trump has decried since at least 2017. U.S. tariffs on German car imports are lower than European tariffs on American autos, but Germany’s trade surplus persists in large part because it is driven by German macroeconomic policies that result in too little domestic investment and generate too little domestic demand. As a result, German manufacturing focuses more on the export market than on domestic consumption. German steps to boost domestic demand—for example, increasing its defense spending to three percent of GDP, boosting domestic infrastructure and investment, and beefing up spending on research and development—would be more effective at reducing trade imbalances than increased U.S. tariffs on German products. Changes in global capital flows could also be used to rebalance global trade.

Prior to the rise of the post–Cold War trading order, policymakers around the world treated macroeconomic factors as an essential aspect of trade policy. That is why the Plaza Accord focused on reducing the value of the U.S. dollar instead of establishing rules governing currency manipulation. American trade policymakers did not exactly abandon their understanding of the importance of macroeconomics over the last 30 years; the Obama administration repeatedly urged China to boost domestic demand as a way of reducing the U.S. trade deficit. But American trade officials pivoted away from using tools such as tariffs to persuade foreign governments to change their macroeconomic policies. Instead, they focused on the rules that governed the actual flow of goods and services across borders. Trump, as a politician who relishes making threats, is well-positioned to bring this tradition back. And his economic team, stacked with business executives, is well-positioned to identify macroeconomic policy objectives that would reduce the U.S. trade deficit and help U.S. workers.

Shipping containers at the Port of Los Angeles, October 2024

 

Balancing Act

Trump is not the only leader who will get a say in rewriting the trading order. Washington’s trading partners will have to decide whether to negotiate with him or to dig in for a protracted trade war. Mexican President Claudia Sheinbaum recently illustrated this when she responded to Trump’s tariff threats by both threatening retaliatory tariffs and calling Trump to indicate that she was prepared to talk.

Still, the president-elect’s return to the White House comes at a moment of heightened leverage. The American economy has substantially outperformed its peers in recent years—for example, growing three times as fast as the European Union since late 2019—making the United States the essential market for companies based in partner countries. Trump can use the U.S. edge in artificial intelligence, semiconductor design, and other key technologies as an additional source of clout, guaranteeing that partners that agree to his trade terms will get access to cutting-edge chips for AI and other high-tech American products.

Countries have few alternatives to dealing with Trump. Economic growth in China is slowing, making the state a less attractive trade partner. Smaller economies will continue to strike deals among themselves, such as the trade agreement that Canada and Indonesia signed in early December. But the economic stakes of such deals will generally pale in comparison with those struck with the United States, given the vastly larger scale of the U.S. market.

Trump and his team should work to frame trade demands in ways that leverage supportive voices abroad. Many European defense officials are already urging their countries to boost defense spending and make other needed industrial investments, and a growing number of officials across the G-7 support restricting trade with China. Trump can work with these figures to push for deals. Trump should also remember that in these agreements, outcomes matter more methods. If Europe and other G-7 allies commit to reducing commercial ties with China but want to deploy their own toolkits to get there, he should not object.

But diplomacy that can achieve successful deals will not be easy, and Trump’s penchant for bombast could undermine his goals if he takes it too far. Well-managed threats can bring foreign governments to the table. If Trump gets too aggressive, however, negotiating partners facing their own domestic political pressures may have little choice but to dig in for a fight—an outcome that will force the president to follow through with tariffs he finds expensive to implement. Moreover, countries will need to know that the deals they make with Trump will stick. No one will want to make an agreement if they think he will simply come back the next day with more threats. Trump will need to consult closely with Congress and key stakeholders as he fleshes out specific trade objectives to reassure foreign partners that the agreements are likely to hold. He can also get broader buy-in by acting quickly: if Trump manages to secure several deals in rapid fashion, he will build momentum for agreements with others.

The stakes of Trump’s trade plans are high, for both the U.S. economy and its geopolitical alliances. Millions of American jobs depend on the flow of goods in and out of the country. The value of the U.S. total goods trade—exports as well as imports—amounts to more than $5 trillion per year. And the United States needs allies in its strategic competition with China, not policies that push them away. But if Trump pulls it off, he might just drive the most consequential rewrite of global trade in decades. The result would be a United States that is both more prosperous and more secure.

 

 

For updates click hompage here