Making Trade Great Again
Potential policy options for the U.S. administration
Just over one month ago, on “Liberation Day,” the Trump administration announced a sweeping series of tariffs, ranging from ten percent to more than 100 percent that sent shockwaves through the global economy. Previously, I outlined the potential motivations and parameters for these trade policies, but at a high level, the goals of the policy were reasonably clear. They were to:
reduce the American trade deficit and “reshore” significant manufacturing capacity in the United States, something President Trump has spoken about for decades.
level the playing field with other countries, from Canada to China, whom America had long allowed to erect their own trade barriers with few reciprocal measures from the United States.
secure critical supply chains in areas like pharmaceuticals and national defense.
attempt to reorient allied and partner countries around the world to isolate China and diminish global dependence on Chinese manufacturing and natural resources.
The initial market reaction was negative, though financial markets have since recovered to pre-Liberation Day levels. The administration soon announced a ninety day pause on tariffs on most countries at the ten percent level to allow for bilateral negotiations, which are currently in progress. But there are ongoing concerns about the uncertainty of that process, including potential price inflation for American consumers, challenges for business in the United States as their input costs grow substantially higher (particularly small business), and the reaction of global allies and adversaries alike (including selling off U.S. treasuries).
With the benefit of one month’s hindsight, it’s becoming easier to see outcome to those ongoing policy efforts that might meet the administration’s stated goals while simultaneously providing certainty for the U.S. and global economies that can assure global growth and avoid the recession (or at least a prolonged recession) that many market commentators are now predicting.
Such a policy could include several key features including modest and reciprocal global tariffs, clearly identified industry priorities, key partnerships with allied and friendly nations, a well articulated approach to China, and incentives to encourage the re-shoring and friend-shoring of critical industries.
Modest and reciprocal global tariffs
There is no question free trade is a net positive for the global economy, including American consumers. The era of free trade, based on the economic principal of “comparative advantage” (which Paul Samuelson identified as the one social science postulate that is both “true and non-trivial”) has led to enormous, if unequal, economic growth and reduced costs to consumers in the U.S. and abroad. Given the administration’s stated goals, a return to a no tariff environment in the U.S. seems unlikely, but a modest and reciprocal approach to tariffs could allow the administration to pursue its goals without major negative economic consequences.
A five to ten percent “global” tariff, for example, has the potential to be partially absorbed by foreign producers and lead to a limited, one-time inflationary period as prices adjust in the U.S. As the administration is looking to increase government revenue and lower income taxes, this tariff over the long-term would also serve as a modest consumption tax on a subset of products, which many economists argue is more advantageous for an economy than a production tax (i.e., income tax) and could balance our forms of taxation. And it would be a nudge towards American-made products for U.S. consumers that doesn’t dramatically raise prices.
This could be coupled with a truly reciprocal tariff regime, in which the U.S. simply matches the trade barriers of the countries with whom it trades in an effort to compel those countries to lower their own trade barriers and allow American producers to compete on more level footing. Canada, for example, has barriers to American financial companies and tariffs on goods like milk. There is no reason the U.S. should accept those barriers without consequence—particularly when both countries lowering their barriers would be better for all consumers. In game theory, the most effective negotiating approach is “tit-for-tat,” in which players simply punish one another’s bad behavior with equal retaliatory measures, and such an approach fits with President Trump’s general disposition to be a “counter-puncher” in pursuit of overall fairness.
In the near-term, the administration might extend the current ninety day pause to a year-long pause on the Liberation Day tariffs as these deals take shape and materialize.
Clearly identified industry priorities
It is unlikely the U.S. will be able to eliminate its trade deficit fully, absent significant advances in automation, and there are industries that might not make sense to reshore in any significant way. U.S. wages are too high to, for example, produce all of our or the worlds textiles or shoes. And such goods can be manufactured in a host of low-cost countries without meaningful risk to the U.S. However, COVID demonstrated clearly that the U.S. should not accept being dependent on others for certain critical supply chains, and particularly not adversaries like China. In the case of these critical industries, the U.S. should pursue a strategy of aggressive re-shoring to U.S. companies coupled with friend-shoring to close allies in our immediate sphere of influence (such as Mexico, Canada, and Argentina). What is needed as a precursor, however, is for the administration to clearly identify its list of critical industries and to implement in targeted ways a series of tariffs, trade barriers, and positive incentives (e.g., tax breaks, subsidies) that allow for the relocation of those supply chains. Such industries might include:
Pharmaceuticals and medical devices
Sensitive defense technologies
Artificial intelligence and affiliated technologies (like semiconductors)
Key natural resources and refinement in areas like oil, gas, and rare earth minerals (where China currently controls 60 percent or more of global supply)
There are likely other areas to target, but even a longer list of target industries with clear goals for American or allied production and a stair-step approach to achieving independence over four years would allow the administration to be targeted on the highest priority areas at minimal cost, with maximum focus, and in a way that can truly benefit the American people while minimizing disruption to American business.
Key partnerships with friendly and allied nations
The administration has rightly identified China and its allies as the key economic and national security threat to free nations around the world. Many countries quite different than the U.S., including Vietnam and India, likely see that threat clearly as well. And the U.S. has a natural set of decades long partners on every continent who share values with us as a democratic republic and a skepticism of Chinese influence. Give the U.S. has neither the labor force nor the appropriate wage structure to manufacture many goods, the administration can, through its bilateral negotiations, help American business clarify which countries are the right long-term partners for their supply chains, particularly those businesses migrating their production out of China. Such a clarification would also reinforce our military and strategic alliances with countries in NATO and in the Western hemisphere, offering America a coalition to counter dictatorships around the world—including places like Russia, Iran, and China—while generating mostly free trade zones with mutual economic benefit.
Some of this will be made clear through the outcomes of our bilateral trade negotiations with countries like Japan, South Korea, the EU, Mexico, Brazil, Vietnam, and others. But that clarity might be reinforced by targeted tax breaks or subsidies for American companies expending the cost to relocate sourcing and supply chains. The clearer this list, the sooner it is developed, and the longer-term the agreements the better, as that will restore the certainty and predictability businesses need to fuel investment and growth.
A well articulated approach to China
The Trump administration has, since his first term, rightly identified the Chinese government as the most threatening global adversary to free countries around the world. And since its admission to the World Trade Organization as a “developing country,” China has been allowed to abuse trade rules, steal intellectual property, manipulate currency, and subsidize domestic industry creating an unfair playing field in the global economy and real risks to the stability of countries dependent on China for manufacturing and national resources. Simultaneously, China has built of its military infrastructure in a way that threatens Taiwan and its other neighbors.
It is time for a “global reset” on the way the world’s biggest consumers, particularly the U.S. and Europe, approach China. But that reset can be nuanced in such a way that continues to put pressure on China but allows other nations to diversify their exposure away from that country in a way that is less damaging to their own near-term economic success.
A structured deal through the WTO and/or U.S. bilateral negotiations might include key features such as:
Treating China as a developed country, and no-longer exempting it from the trade rules others play by, including a crackdown on Chinese theft of intellectual property and trade secrets.
Rapidly exiting dependence on the previously identified critical industries, like rare earths and pharmaceuticals, by identifying new providers of such resources domestically and abroad and using both negative incentives, like tariffs, and positive incentives, like tax breaks and subsidies, to American companies navigating that transition.
Raising barriers to other, less critical, industries over a longer period of time to allow for U.S. companies currently dependent on Chinese products and inputs to secure and build-out capacity in more advantageous locations in the U.S. and in identified allied trade partners. Manufacturing capacity takes years, not months, to build. It is expensive. And companies can’t make those investments of time and money unless they know the policies supporting those investments will be stable across administrations. Allowing tariffs and other barriers with China to “phase in” over a period of years for non-critical industries will force American and allied producers to take action but allow them to do so methodically and with confidence.
We should also allow an opening to China if it implements true reform to participate meaningfully in the global trade system. China’s economy is currently in a precarious situation. And the average Chinese person is not the Chinese Communist Party. At one point, China was on the path to meaningful reform—a path abandoned over the last several decades. If it restores its commitment to that path—including reforms in human rights, economic liberalism, and respect for other countries—we should offer it incentives to do so and an opportunity to participate constructively in the community of nations as it makes progress.
Incentives to encourage reshoring and friend-shoring of critical industries
As mentioned, a reset in the global economy will take both carrots and sticks. And shifts in supply chains will take significant financial investment at home and abroad. Recently, Treasury Secretary Scott Bessent hinted at accelerated depreciation and tax incentives, for example, for the costs required to onshore key supply chains. And such policies would dramatically expand the capacity of U.S. businesses to build out domestic and friendly nation manufacturing in a way that doesn’t cripple near-term economic performance.
In addition to tax incentives, the administration might consider expanded low-cost credit lines to U.S. manufacturers and natural resource producers (particularly small businesses) who might not have sufficient capital. It should lean into aggressive regulatory reform to allow more rapid construction of facilities in the United States and more expeditious exploitation of natural resources (like our own deposits of rare earth minerals) that could provide an immediate economic jolt to American business and enable long-term innovation and growth. It should also continue to open the door to aggressive foreign and domestic investment in U.S. capacity, particularly from friendly nations, which is already one of the great successes of the Trump administration which has solicited historic investments from companies like Softbank and NVIDIA and countries like Saudi Arabia. These positive incentives will play a key role in building the U.S. into the world’s most dynamic economy, and restoring our ability to build things here and in like-minded neighbors—a worthy goal both for the American worker and the economy writ large.
All of this is possible. And it seems the administration is narrowing in on approaches like those described above to achieve its objectives. But clarity is key—both in the new global rules of trade and in the way those are communicated to American companies, allies, and adversaries alike. Such clarity and stability would allow for the administration to pursue its priorities while moderating economic impacts in way that can hopefully make American companies—and global economic dynamism—great.
