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Like his first term, promises will likely give way to pragmatism.
By: Antonia Colibasanu
Today's global
trade patterns are very different from when Donald Trump began his first
term as U.S. president in 2017. The first Trump administration
overturned the free trade dogma that had dictated U.S. policy during
many previous administrations and placed much greater emphasis on the
political and security aspects of foreign trade. In the ensuing years,
the U.S.-China contest for global influence intensified, a global
pandemic triggered a worldwide reassessment of supply networks, and the
U.S. and Europe launched an effort to isolate Russia economically
because of its invasion of Ukraine. In this new economic era, efficiency
is out, security is in, and fewer and fewer people consider
“protectionism” a dirty word. Against this backdrop, Trump is assembling
his second administration, with important implications for the U.S.
economy and world trade.
The central goal
of Trump’s trade policy is unchanged from his first administration: to
reduce the United States’ reliance on foreign, particularly Chinese,
supply chains and shift more manufacturing to the U.S. and friendly
countries. Also like his first term, Trump’s preferred instrument is
tariffs. During the campaign for a second term, Trump threatened to
impose tariffs of either 60 percent or 100 percent on all Chinese
imports to counter Beijing’s trade practices, which were deemed unfair
in a 2018 U.S. Trade Representative report. He also supported
restrictions on Chinese investment in U.S. energy, technology and
agriculture.
Beyond China,
Trump aims to reduce the U.S. trade deficit with major partners,
especially the European Union. To do so, he has proposed a blanket 10
percent tariff on all imports and reciprocal tariffs on imports from
countries that levy duties on U.S. goods. He has also proposed a 100
percent tariff on all cars made outside the United States, reflecting
his enthusiasm for boosting U.S. manufacturing employment and
production.
Given the
continuities in the trade principles from Trump’s first term, it may be
useful to review how the first Trump administration conceived of its
trade policy and how it evolved.
Trade War With China
As a candidate in
the 2016 presidential election, Trump accused China of currency
manipulation and unfair subsidies and proposed a 45 percent tariff on
all Chinese imports. As president, however, he singled out specific
sectors while leaving others alone. From 2018, the U.S. targeted various
Chinese sectors with wave after wave of tariffs between 10 percent and
25 percent. This continued until January 2020, when Washington and
Beijing reached a temporary truce that included a reduction in U.S.
duties and a Chinese commitment to buy a specific amount of U.S. goods.
Despite their
hopeful agreement, over the next few years the case for decoupling the
U.S. economy from China grew only stronger. First, China did not live up
to its purchasing commitments under the so-called "phase one deal," in
part due to the COVID-19 pandemic, which broke global supply chains for
several years. Then in early 2022, after Russia invaded Ukraine, Beijing
began helping Moscow sidestep Western sanctions. It was hardly
surprising, therefore, when the Biden administration in 2024 imposed new
tariffs on Chinese semiconductors, renewable technologies, steel and
more – including raising tariffs on Chinese electric vehicles to 100
percent from 25 percent. Additional increases are scheduled to take
effect in 2025 and 2026.
Still, some
Chinese officials are optimistic about Trump’s return, believing that a
Trump administration will be better able to negotiate a trade
settlement, like it did near the end of his first term. Beijing expects
the Trump team, once in office, to walk back its threats of blanket
tariffs and instead hit only specific products. Chinese officials also
took note of the ferocious political backlash in the U.S. to
higher-than-normal inflation, which was not a significant factor in the
U.S.-China trade war during Trump’s first term. (This despite the fact
that U.S. importers paid an estimated $32 billion more annually as a
result of the tariffs, according to a 2021 U.S. Chamber of Commerce
report.) They probably assume that the threat of another bout of rapid
price increases due to tariffs will force Trump to be more restrained in
round two. Indeed, the U.S. has cut its dependence on Chinese
electronics and semiconductors but still imports more than 90 percent of
certain antibiotics and other critical drug components from China,
according to the U.S.-China Economic and Security Review Commission.
The Rest of the World
All politicians
make promises during campaigns that cannot be kept. In 2016, Trump
promised tariffs of 15 percent to 35 percent on goods made by U.S.
companies that had relocated abroad – a threat that would have inflicted
serious pain across U.S. business sectors. Now, he is promising a
blanket tariff of 10 percent on all imports and a 100 percent tariff on
cars made outside the United States. Neither pledge is feasible unless
the administration is willing to abandon other priorities like tackling
inflation and sustaining U.S. production. Tariffs raise production
costs, which would likely be passed on to U.S. consumers, especially in
sectors without domestic alternatives. Long-term market growth might
suffer, and sectors with significant international exposure such as
technology, agriculture and manufacturing could see their stock prices
fall.
However, Trump
has also advocated a “fair trade” approach that would see the U.S.
impose tariffs on countries that tax U.S. goods. Though this could push
some partners to reduce their duties, while others may retaliate with
restrictions on U.S. exports, damaging U.S. agriculture and
manufacturing.
During Trump’s
first term, Canada and Mexico reacted to similar tariffs by retaliating
against politically sensitive U.S. industries, forcing Washington to
back down. Both countries introduced tariffs on U.S. steel and aluminum
after the U.S. enacted a 25 percent steel tariff and a 10 percent
aluminum tariff. Mexico also targeted U.S. pork, apples and cheese
exports. In his second term, however, Trump will oversee negotiations on
whether to renew the U.S.-Mexico-Canada Agreement (USMCA), giving him
the opportunity to introduce new conditions on trade and security
issues.
The EU also
retaliated after the U.S. placed tariffs on European steel and aluminum
in 2018, hitting back with tariffs on U.S. agricultural, pharmaceutical
and tech goods. In 2019, the World Trade Organization ruled in
Washington’s favor in a longstanding dispute with Brussels over
subsidies, as a result of which the U.S. imposed a 10 percent tariff on
European aircraft and a 25 percent duty on EU agricultural products. The
Biden administration suspended these tariffs as part of a five-year
truce with the EU in 2021, but the new Trump team believes tariffs will
force Europe to make concessions on trade and security. Any new tariffs
will especially hurt Western European countries like Germany and Italy,
whose exports are heavily skewed toward the U.S. market.
Universal tariffs
are impractical for strategically important sectors like steel and
aluminum, which are vital for infrastructure and manufacturing. From the
outset, the Trump administration applied steel and aluminum tariffs
selectively, granting exemptions on occasion. In 2018, he fully exempted
Australia from steel and aluminum tariffs, while giving Argentina,
Brazil and South Korea quota-based exemptions. Canada and Mexico won
exemptions in 2019, as previously mentioned, though certain derivative
products faced tariffs again in 2020. Tariffs were reapplied to Canadian
aluminum in August 2020 but lifted a month later. Under Biden, the U.S.
shifted from tariffs to tariff rate quotas for the EU, Japan and the
United Kingdom.
Setting Expectations
The second Trump
administration, like its first iteration, will emphasize economic
nationalism, with tariffs and related measures designed to bolster U.S.
manufacturing and reduce its reliance on imports. However, despite
campaign rhetoric suggesting a hardline approach, actual implementation
will likely be more flexible, balancing trade policy with other
considerations such as U.S. alliances, global supply chain dynamics and
inflation concerns.
According to
mainstream economic theory, free trade generally raises economic output
and income, while tariffs tend to have the opposite effect.
Historically, tariffs have raised costs and limited supply for U.S.
businesses and consumers, ultimately reducing incomes, employment and
overall economic output. Higher consumer prices also erode the after-tax
value of labor and capital, discouraging work and investment. Tariffs
can also cause dollar appreciation, which may offset some domestic price
increases but make U.S. exports more expensive, cutting into revenues
for U.S. exporters.
But protectionism
often resurfaces during times of international conflict, when nations
prioritize self-sufficiency and shy away from doing business with
adversaries. In these situations, protectionist policies can support
domestic industries critical to national security and counteract
perceived unfair practices or sanctions. Nevertheless, though
protectionism can give some industries a short-term boost, it limits
long-term growth by reducing competitive pressures, ultimately hampering
innovation, efficiency and global competitiveness.
Given these
tradeoffs, the Trump administration might moderate its approach to
balance impacts on U.S. industries and consumers. As in his first term,
when tariffs were sometimes paused or modified, Trump 2.0 could adopt a
pragmatic stance, balancing assertive trade measures with economic and
market realities. This may mean negotiating exemptions, quotas or tariff
adjustments, especially with allies, to minimize disruptions to
economic ties and strategic relations. Trump’s approach could also
reshape international partnerships, as legacy alliances give way to new
partnerships better aligned with U.S. strategic goals. While replacing
some partners may be challenging in key sectors, in others it could
enable the U.S. to forge more compatible alliances that better serve its
economic and security interests. |