Mon Mar 31

These 3 arguments are part of the long game in Trump’s trade wars

Written by: Markus Wagner, Professor of Law and Director of the UOW Transnational Law and Policy Centre, University of Wollongong

Since returning to office in January, US President Donald Trump has doubled down on using trade measures – mostly tariffs – to reshape global trade. He plans to impose reciprocal tariffs ^[1] on what he has labelled “Liberation Day ^[2]”, April 2.

The Trump administration claims ^[3] US producers face higher tariffs and more restrictions abroad than foreign producers when they export to the US.

The administration also examined tax systems such as Europe’s Value Added Tax and Australia’s GST, import regulations and other factors. It believes – mostly wrongly – these unfairly disadvantage American businesses and contribute to the US trade deficit.

As with many Trump initiatives, actual tariffs often change significantly between announcement and implementation, if they are implemented at all.

His reciprocal tariffs have been narrowed to imports from the US’ largest trading partners ^[4] instead of imports from all countries. There may also be tariffs on specific sectors. Last week, Trump announced 25% tariffs on cars ^[5] from overseas. At the weekend said he “couldn’t care less ^[6]” if this made cars more expensive for US consumers.

Coercive control, revenue and re-shoring

President Trump has raised a myriad of puzzling arguments in favour of tariffs. They largely fall into three categories:

The first is the use of tariffs as a coercion tool against other countries. In the first Trump presidency, trading partners were pressured to renegotiate trade agreements ^[7] such as the renamed but largely identical US-Mexico-Canada agreement.

Similarly, the Trump administration used the threat of tariffs to gain market access, elicit better trade terms or as a form of weaponised trade ^[8] to achieve unrelated foreign policy goals.

Last week, Trump suggested he would consider a reduction in tariffs on China in exchange for a sale of TikTok ^[9] by its Chinese owner.

The second category is the use of tariffs as a source of revenue. The Trump administration envisions tariffs to be collected by a yet-to-be-created External Revenue Service ^[10]. This would form the flip side of the powerful and much-maligned Internal Revenue Service.

Trump claims tariffs will be paid by the exporting country. This would be in theory to finance future tax cuts ^[11]. In practice, tariffs are almost always paid by the importer of goods and usually get passed on to consumers ^[12].

There is a potential contradiction between these two rationales. It appears the Trump administration wants to make at least some tariffs permanent ^[13]. But doing so would almost nullify the use of tariffs as a bargaining chip and coercion tool.

The final category is to encourage companies to “re-shore” production to the US to avoid tariffs and to support US jobs.

This would signal a reversal of what 1994 presidential candidate Ross Perot, speaking of the North American Free Trade Agreement, called the “giant sucking sound going south”. Some manufacturing may return to the US. But the high costs of building new factories, re-routing supply chains and uncompetitive US labour costs will hinder large-scale re-shoring efforts.

A long-term plan?

The Trump administration’s trade moves can be seen ^[14] as part of a larger strategy to reshape the US domestic and the global economic system.

In a recent speech, US Vice-President JD Vance argued for a structural reshaping of the US economy, to increase domestic innovation capacity ^[15].

Vance warned “deindustrialisation poses risks both to our national security and our workforce”. Vance himself sums up this approach by characterising tariffs as a “necessary tool to protect our jobs and our industries”.

This line of argument overlooks a number of critical factors. Tariffs lead to higher prices for consumers. Unless currencies adjust, the inflationary impact could disadvantage the very people that can least afford it ^[16].

The same is true if other countries respond to US trade measures by responding in kind ^[17], as Canada and the European Union already have.

American farmers and other export-oriented industries will be hard hit. From a strategic perspective, the US position as global leader has suffered a severe blow. Some countries are openly pivoting to ^[18] its geopolitical and economic rival, China.

If this scenario comes to pass, the US pullback – an outright withdrawal is unlikely – from the highly integrated international trading system might end up a more chaotic version of the UK’s pursuit of Brexit.

A step back in time

The world of liberalised trade that followed the end of the Cold War in 1990 is ending. Countries will turn inwards, prioritising their economic security and resilience. The costs of this turn away from multilateralism and international institutions, however, are not just economic.

The close economic integration we have witnessed post-1990 has led to reduced uncertainty in international economic relations, increased international security ^[19] and greater prosperity ^[20].

A return of the “beggar thy neighbour ^[21]” policies of the 1930s would be a dangerous path, with the world inching closer to the abyss. “Liberation Day” might push the world over the edge.