By: Kevin Nealer
Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. Kevin Nealer explains how trade policy under the Trump administration has upended basic assumptions about how the global goods trade operates.
The trade policy community has indulged in the understandable conceit that Trump’s tariff activism is best explained as a version of traditional American trade policy on steroids. While current tariffs (before whatever happens after Aug. 1) are at five times the pre-Liberation Day level – a 70 year high – these are commonly explained as a coercive opening gambit in trade negotiations that are somehow analogous to US trade pressure on Japan in the 1980s or the never-ending disputes with the EU. This framing is similar to putting Trump national security policy through the filter of existing US defense obligations and taking comfort in the notion that NATO and Asian partners have benefited from free rider status. The recent commitment to heightened defense spending is proof of concept that Trump’s methods are crude, but not really ahistorical. It’s all normal, just done with an excess of arm waving and “just Trump” game show presentation. “Nothing to see here. Let’s move on.”
This is a complete failure of imagination and analysis. As the latest barrage of threats to Canada (our largest export market), the EU, Mexico, Japan, and Brazil make clear, the outcomes of any and all of Trump’s trade activism will be 1) changed assumptions about the real world features of the trading system and 2) guaranteed long-term risks to the movement of goods and investment flows. The investment implications are thus far the result of businesses temporizing: the true price will come in damage to US innovation, human capital, and a changed view of investing in the US market. (Pre-tariff stockpiling mitigation efforts are likely at or near the end of depleted inventories now.) It is worth keeping in mind that the biggest impact of Brexit on the UK economy was the drag on investment. Despite breathless White House claims of increased inbound FDI, that may well be true of Trump’s never ending tariff wars as well.
These are not adjustments at the margins of global trade. Trump’s trade activism has changed basic assumptions about the way global trade in goods works. The US has effectively left the WTO and all twenty of its Free Trade Agreements. Full stop. Trump 1.0 taught that withdrawing from international obligations like NATO can be messy and (back when Congress still exercised some oversight) could require Congressional action. Indeed, Trump’s NATO allergy in his first term provoked enough antibodies on the Hill to result in legislative speed bumps to an alliance exit.
That’s not a mistake Trump 2.0 is making on trade policy this time. Without even pretending to get negotiating approval through the convention of Trade Promotion Authority, Team Trump is simply ignoring the dispute resolution and consultation processes under US law and international agreements. Trade partners faced with coercive tariffs understandably have employed basic good game theory, not calling out the violation of these US obligations. They have adopted an “eat me last approach” whereby they play along with US asymmetric trade demands to buy down trade imbalances. What is the point of standing alone to call for “playing by the rules” when your opponent has upset the game board? Foreign negotiators get this; American trade elites seem blithely unaware.
The US no longer has the moral or political authority to define the terms of trade liberalization. Having violated (without actually leaving) the WTO’s two key precepts – most favored nations treatment and national treatment – the US has rejected a global system it created based on nondiscrimination to embrace unapologetic mercantilism. The true cost of that change in the policy narrative cannot be predicted; it is not nothing. Not only are US WTO commitments now meaningless, but all twenty US Free Trade Agreements have been invalidated by an “America First” ideology that disregards the dispute resolution channels of those deals – many decades old. The learning is clear and permanent: an American commitment to trade rules is now meaningless. Trump has proven that there is no guarantee an agreement reached under one administration will be respected by a future president. This isn’t an academic point – predictability is an important part of cross-border investment and supply-chain decisions.
Trump’s “negotiations” are completely asymmetric. In no case has the US offered any new US market access or other advantages that lower trade barriers here for trading partners. The only question these negotiations answer is when and to what extent the US will stop penalizing foreigners for trade deficits in their advantage, defense spending misalignment, border policies, or any other bilateral grievance unrelated to market-based realities. (Note that we have a trade surplus with Brazil, but Trump’s bromance with Bolsonaro, rivalry with Lula, and allergy to BRICS still make them a target.) Said another way, what price is the other party willing to pay to end unilateral US penalties without changes in American policies, no matter how discriminatory?
There is no endpoint to US demands. As our largest export market, Canada, discovered after renegotiating NAFTA during Trump 1.0, no commitment by the US to a “new, improved” trade reality is permanent. The American demand signal for mercantilist advantages never stops; the goal posts move and the messaging from US interlocutors is inconsistent. Similarly, Trump’s threat of an additional 10% tariff on BRICS countries shows tariffs will often be his go-to response to foreign government actions he does not like. Tariffs – at whatever levels agreed – will not write an end to Trump trade activism and trade negotiations will continue to conflate trade issues with non-trade related demands. Team Trump has deployed and plans on expanding sector-specific cases under Sec. 232 of US trade law. The sudden increase of steel and aluminum tariffs from 25% to 50% and addition of copper duties are the latest evidence of unpredictable sectoral activism. These duties will be in addition to the foundational 10% and any other country-specific tariffs. By one estimate, Sec. 232 cases could cover as much as 40% of all US imports. The recent threat to pharmaceutical imports and semiconductors should be taken seriously.
Retaliation – the equal and opposite reactions by injured trading partners – thus far has been muted as trading partners seek to engage in the pretense of trade negotiations to mitigate the damage of Trump tariffs. That is certain to end as the theatre of trade talks gives way to the asymmetry of punitive duties dictated by the US. EU members have already approved retaliation of up to 25% tariffs on €21 billion worth of US goods by Aug. 1 if a deal is not reached, and the Commission is seeking support for tariffs covering an additional €95 billion worth of US goods (agricultural and industrial), as well as potential action against services (including tech companies and limiting access to public procurement contracts) and export restrictions (steel and chemicals).
China’s response to Trump tariffs has mitigated somewhat after talks in Geneva and London, but it remains to be seen how next-round talks – Commerce Secretary Lutnick, Treasury Secretary Bessent, and USTR Greer may meet their counterparts in early August – will progress; we have high confidence that any further US duties and export control activism could still provoke further curbs on Chinese exports in response.
The long-term impact of the Trump trade wars is to deny the predictability of any American trade commitment and assure that Trump tariff activism means continued instability in supply chains and investment. Trump’s legislative and SCOTUS success – and the fact that US attacks on Iran have yet to metastasize into a wider conflict – has amplified a White House view that Trump’s policies are winning and that economic doomsayers continue to be wrong while duties play an ever-larger role in revenue. Trump has been made lusty and bold by equity market indifference to tariff risks.
Trump trade policy has blown open the Overton Window of expectations about the continuum on which American economic policy may move. Prudent trade and investment partners have permanently repriced America’s commitments – none more decisively than our largest export market. The past may be a country no one may visit, but too many American trade analysts are living there rent free.