The United States Needs To Pivot on Trade
The administration’s inconsistent tariff policies are creating dangerous levels of uncertainty that will harm the U.S. economy
On April 2, the Trump administration shocked the world by announcing a panoply of tariffs on most imported goods from practically every country. This “Liberation Day” policy included a 10% baseline tariff on goods from virtually all foreign countries and higher “reciprocal” tariffs on goods from countries with especially large trade surpluses with the United States. Not even tiny, remote islands uninhabited by humans (only by some penguins and seals) were spared.
This strategy is intended to bring manufacturing jobs back to the U.S. and make our country less dependent on other countries, especially those that engage in “unfair” trade practices. But unless the administration pivots soon to a more coherent plan, the American and world economies will suffer greatly.
Tariff Troubles
Many economists and other observers have harshly criticized the formula used for calculating the reciprocal tariff rates. If country X has a 25% tariff on U.S. goods, and the U.S. responds by imposing a 25% tariff on goods from country X, that’s a reciprocal tariff. However, rather than being based on a foreign country’s tariffs or other trade barriers (such as subsidies on goods produced in that country), the current reciprocal tariff rate formula was based on that country’s trade surplus and its total exports to the U.S. So even a country with no trade barriers could be penalized.
For example, Vietnam has an approximate 5% average tariff on U.S. goods, but since it exports much more to the U.S. than it imports, it was slammed with a whopping 46% reciprocal tariff. Even net importers of U.S. goods such as Australia, Spain and Singapore saw their tariff rates rise. Put differently, these reciprocal tariffs aren’t really about reciprocity.
Markets reacted very negatively to this news. Stock and bond prices fell as investors, fearing recession, sold their assets in a panic. The alarm was so great that just one week later, on April 9, President Trump partially walked back his sweeping changes and paused reciprocal tariffs on all countries except China for 90 days. The pause is intended to give those other countries and the U.S. time to create new trade deals deemed favorable to the U.S.
U.S. trade policy with China has been a saga of its own. While pausing the reciprocal tariff rates on other countries, Trump raised the tariff rate on Chinese goods to an incredibly high 145%. China is the United States’ largest trading partner and exports products ranging from textiles, furniture, appliances and baby strollers to chemicals used in pharmaceuticals and rare earth minerals needed for manufacturing. Fear of a prolonged trade war with China has also caused chaos in financial markets and forced the Trump administration to acknowledge that it seeks to scale back the tariffs.
The Liberation Day announcement, the partial walk-back on reciprocal tariffs and the confused messaging about the future have caused economic uncertainty to skyrocket. What will happen at the end of the 90-day pause? Will the U.S. really levy very high tariffs against poor, non-hostile countries such as Cambodia and Lesotho? Before Liberation Day, U.S. tariffs on its traditional allies—Australia, Japan, South Korea, Western Europe, etc.—were around 2%. Even if the reciprocal tariffs are fully dropped, will these allies still be eager to cooperate economically or militarily with us?
How long can the U.S. realistically tariff Chinese goods at rates over 100%? Further, most U.S. imports are not consumer goods but intermediate goods, which U.S. companies use to create final products sold either domestically or internationally. Will the U.S. really keep high tariffs on these goods that are critical for American competitiveness? How about household staples like bananas, coffee and toys?
Economic uncertainty discourages investment in long-term projects such as building factories. Global trade is already starting to slow. As households brace for higher prices, consumer inflation expectations have shot upward.
Perhaps most ominously, the U.S. dollar has been falling in value relative to other currencies, while U.S. bond yields have risen. As economist Noah Smith has pointed out, when bond yields rise, investors normally buy those bonds to earn more interest. Investors demand more dollars to buy those bonds, so the dollar’s value rises. However, the recent divergence between yields and the dollar’s value suggests investors are worried about investing in the U.S. They would rather have assets denominated in other currencies (such as the euro) and now demand a higher interest rate on U.S. bonds, which they deem to be riskier. Put together a slowing economy, rising prices and panicking investors, and the United States could have a crisis on its hands.
A Better Way
The U.S. needs to pivot fast to a more coherent strategy. First, the country needs a better approach on China. Making the U.S. less reliant on China is the most reasonable part of Trump’s trade agenda because China is a dangerous authoritarian rival. Rather than alienate other countries with heavy tariffs, however, the U.S. should trade more openly with China’s regional rivals. Fortunately, Treasury Secretary Scott Bessent is already moving in this direction and has said that he’d like the U.S. to work with India, Japan, South Korea and Vietnam to approach “China as a group.”
Second, despite its legitimate interest in containing China, the U.S. needs a way to reduce the size and scope of its tariffs on Chinese goods. Trade economist Adam Posen has warned that the U.S. depends on Chinese imports that it cannot easily reproduce domestically. China has suspended the export of critical minerals and magnets that are essential for the production of cars, airplanes, semiconductors and weapons throughout the world. It’s not clear how the U.S. could currently win a trade war with China, especially without the help of allies. The Trump administration does not necessarily have to “go easy” on China, but it should find a way to scale back the massive tariff rates it has imposed.
Third, the reciprocal tariffs based on trade deficits should be canceled. A trade deficit is not inherently a bad thing, as it simply means a country imports more than it exports. Trade is not a zero-sum game. I run a trade deficit with my grocery store because I pay the store for the groceries I want. I am not losing simply because I run a trade “deficit.” Similarly, the grocery store benefits from my business. The same dynamics apply to international trade.
Fourth, the U.S. should make clear that it is willing to reduce its trade barriers with every friendly country on Earth if that country can demonstrate its own commitment to opening up its markets to U.S. goods and services. While eastern and southern Asian countries might be the most important countries to court to counter China, the U.S. can strengthen its position more broadly by embracing trade across the globe.
Markets are reeling from the chaotic changes to trade policy of the past three weeks. Households and firms are worried about inflation, recession and a financial crisis. Policymakers need to act fast to stop these concerns from turning into reality.