On trade and tariff policy, President-elect Donald Trump should be taken not just seriously but literally.
As President-elect in 2016, Trump vowed to withdraw the United States from the Trans-Pacific Partnership (TPP) agreement; renegotiate the North American Free Trade Agreement (NAFTA) under threat of withdrawal; label China a currency manipulator; bring cases against China at the WTO; and use every lawful presidential power to remedy trade disputes with China and other countries, including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962. Each vow was fulfilled. For added measure, the Trump administration also crippled the functioning of the World Trade Organization's (WTO) dispute settlement mechanism by using its veto power to deny a quorum of eligible Appellate Body judges.
With President-elect Donald Trump now promising to impose tariffs of at least 60% on all Chinese goods as well as revoke China's most favored nation (MFN) trade status, the threat should be taken both seriously and literally (although on the latter point, Congress gets to impose its view too). As president, he will enjoy extensive tariff proclamation authority to ratchet tariffs upwards. And so long as he acts within the (wide) scope of his congressionally delegated tariff-raising powers on the basis of an “intelligible principle” that bears a “reasonable relation” to his proposed trade policy objective, courts will not second-guess the exercise of his authority to impose additional tariffs.
Trump's obsession with the tariff instrument lies in his philosophical belief that goods that are consumed in the United States must be produced at home using American workers. To the extent that some of these goods are imported from overseas, an equivalent dollar amount of American goods should be purchased by that relevant country. At day's end, bilateral trade must be balanced. Anything less is a 'loss' for the United States. And, hence, his dislike of the sort of large bilateral trade surpluses run by China, and his sense of personal affront when they are run by allies, such as South Korea, which doubly happen to benefit from expensive treaty-underwritten U.S. defense guarantees.
The incoming president's view on trade and tariffs may be anathema to conventional economists. But conventional thinking, economic or otherwise, did not catapult him to the Oval Office. Besides, with the American consumer standing head-and-shoulders above its global peers, tariff-regulated access to the U.S. market is a useful point of leverage to instigate dealmaking with foreign countries on a variety of trade and non-trade concerns – be it striking up quantitative purchase targets of U.S. goods to balance trade, bending foreigners to equalize tariff levels with that of the U.S.' to level the competitive playing field, or shutting down illegal immigration passageways. No wonder, in Trump's view, “trade wars are good, and easy to win.”
Trade wars are no doubt easy to start. But are they really as “easy to win” too, as Trump claims? The cumulative evidence points decisively to the contrary. Granted, the tariffs have reduced the U.S.-China trade deficit by over $100 billion from its peak, which is not exactly chump change. On the other hand, a litany of data points highlight the tariffs as a massive self-deluding exercise in trade marginalization on the part of the United States. And that ever since the first shots were fired six-and-a-half years ago with the imposition of additional Section 232 duties on steel and aluminum imports and Section 301 duties on an initial list of $34 billion of Chinese imports in the summer of 2018, the trade war has been a back-handed gift to Beijing as it were.
First, China's overall market share of global goods exports has increased over these past six years, even as China's share of U.S. imports have slipped – meaning that the country has become more, not less, important to the rest of the global economy. In a related vein, European Union-China trade ties have intensified too during this period, particularly in medium-skill and technology-intensive goods. This intensification is set to deepen over the next decade, notwithstanding the various subsidization-linked trade measures proposed by Brussels that target Chinese producers. As for the U.S.' overall goods trade deficit, it is larger – not smaller – as a percent of GDP in 2024 than it was in 2017. The decrease in Chinese exports to the U.S. has simply been deflected elsewhere.
Second, while there has been a relocation and diversification of production outside China to bypass the Section 301 import tariffs, the evidence points to this diversification being limited and shallow. Nearshoring to Mexico and friendshoring to Vietnam has dominated the trend. Yet even here, the evidence suggests that final assembly of items in these countries that are destined for the U.S. continue to depend on China-sourced intermediate inputs. This 'lengthening' of supply chains runs counterintuitive to the logic of supply chain resilience which was the supposed reason – or, rather, excuse – to 'derisk' the dependence on China.
Third, much of the foreign direct investment (FDI) that has supported this supply chain diversification has arrived from non-U.S. and non-Western sources. Which, in turn suggests, that it is East Asian – and most likely Chinese investors – providing the FDI that is driving the trade diversification. So much for 'decoupling' from China. And just as Japan. Inc.'s forced relocation of domestic production to East Asia due to American badgering to revalue the yen four decades ago spawned the remarkable Asia-Pacific-wide regional production chains, so also the Section 301 tariffs will come to be seen in time as a blessing in disguise that equipped Chinese firms to internationalize their supply chain operations and obtain valuable 'learning by doing' experience along the way.
Finally, the Section 301 China tariffs have turbocharged calls for protectionism – rarely ever a good idea – within the U.S. body politic. Like salted peanuts, the more they are dispensed to favored industries, the more they will, and are, being demanded. The Section 301 tariffs, alongside the steel and aluminum Section 232 tariffs, have also dislodged the long-held trade policy consensus within the Beltway from its pro-liberalization moorings, with trade policy today shot through with streaks of populism and protectionism. At a time when most major global actors continue to liberalize their trade policy frameworks, albeit at a slower pace, the tariff play has accentuated Washington's relative isolation within the multilateral trading system. It has also spilt across into related domains, such as digital trade, where the U.S. has absented itself from the global rulemaking process at the WTO. And this lose-lose proposition is set to continue with no turnaround in sight.
The United States was once a colossus that strode the multilateral trading order. It authored and underwrote the rules of the system to the benefit of many, including itself. Today, like the weary titan, the United Kingdom, which sought to preserve its tariff preferences and protectionist barriers in the wake of the establishment of the post-World War II order 75 years ago, the Trump team hopes that an unfettered recourse to protectionism-backed managed trade will recreate the return of well-paying manufacturing jobs to Middle America. And tariffs are his instrument of choice in this regard. But Trump should beware – trade wars are easy to start, and they are even easier to lose.
