Get Ready for Trump Trade Wars 2.0

With Donald Trump the presumptive Republican presidential nominee, with a fair chance of securing victory in November, all eyes are turning again to his plans for trade policy, one of his pet subjects.

As disruptive and arguably ineffective as Trump’s policies were during his one term in office, including costly trade wars with China and Europe and the final death knell to global trade rules, he is promising much more a second time around.

Trump has floated the idea of a 10 percent tax on all imports from all countries as well as a tax of as much as 60 percent on everything that comes from China. Former Trump trade officials have spoken of intensifying the Biden administration’s limits on technology exports to China and seem keen to move beyond de-risking economic ties with Beijing toward a full decoupling.

“Look back at the first term—he did what he signaled he would do,” said Stephen Vaughn, an international trade lawyer at King & Spalding law firm in Washington and a former trade official in the Trump administration. “I think people should take him seriously when he talks about what he is going to do.”

It remains unclear under exactly what authority the possible next administration might seek to levy universal tariffs; in the Trump administration, the White House used national-security and unfair trade provisions of existing trade laws. But Trump and those likely to again form his trade brain trust are clear about why they hope to double down on policies that seemed to pay such few dividends the first time around.

Raising tariffs on imports, especially from big economic rivals such as China, would lower the huge U.S. trade deficit and raise billions of dollars in revenue for the U.S. Treasury, they argue. Tariffs on imports, or even the threat of higher tariffs, could force unwilling trade partners to open their markets to more American goods. Raising tariffs on Chinese exports, in particular, could limit the fallout from Beijing’s reliance on exporting to the rest of the world its own industrial overcapacity. And making foreign goods more expensive, even the intermediate bits that are needed by U.S. manufacturers to turn out finished products, will help make U.S. companies more competitive on the global stage.

“I don’t think Trump is advocating tariffs for the sake of tariffs,” Vaughn said. “I think he is looking at a problem, which is: How do we get other countries to give us more reciprocal treatment, and how do we avoid” increasing the trade deficit? “Secondly, how do we stop China from very dramatically distorting a lot of key markets? Again, tariffs may be a tool there.”

Unlike Trump’s first arrival on the political stage, his ideas on trade are no longer coming entirely out of left field. But a reprisal of Trump’s trade policies threatens higher prices for consumers, no improvement to the trade deficit, a tougher competitive environment for U.S. manufacturers, and a weakening of the U.S. ability to rally partners and allies to counter China and Russia.

In 2016, the idea of raising taxes on U.S. consumers to limit the appeal of goods made by friends and foes alike was radical; so was the idea of jettisoning years of groundwork on U.S. trade deals with countries in Europe and Asia, as well as tearing up and renegotiating the provisions of the North American Free Trade Agreement.

But since Trump embraced tariffs and trade wars during his time in office, they have become an entrenched part of U.S. policy—at least under U.S. President Joe Biden, and certainly among the modern-day Republican Party.

“Things that seemed out of the question when he first took office now seem to be acceptable,” said Wendy Cutler, vice president of the Asia Society Policy Institute, ticking off, among other measures, the higher tariffs Trump levied on NATO allies and the systematic dismantling of the World Trade Organization. The Biden administration has maintained many of the Trump-era tariffs and has intensified trade competition, especially over technology, with China.

“Seven years later, this stuff doesn’t look as radical, though that doesn’t mean it is mainstream or the norm,” said Cutler, who has almost three decades of experience as a U.S. trade official.

The first obvious problem with raising tariffs on imports is that inflation has been the one sticky downside to an otherwise booming U.S. economy in the last three years. Raising prices by double-digit percentage points for imported goods from a wide range of countries would seem unhelpful in the fight against inflation; some studies suggest that Trump’s idea for a 10 percent blanket tariff would cost each U.S. household about $1,500 per year. (Trump himself still professes to believe that tariffs, or import duties, are somehow paid by the exporting country.)

Advocates of higher tariffs aren’t worried. “Tariffs didn’t affect inflation last time,” Vaughn said. “Why would it make a difference this time?”

Tariffs also haven’t done anything to lower the size of the growing U.S. trade deficit, which at its simplest is the balance of goods the United States exports minus what it imports. The annual goods trade deficit stood at about $735 billion when Trump took office. When he left, after a slew of tariffs and trade wars meant to bring the deficit down, it stood at $901 billion. Under Biden, who has continued many of Trump’s trade policies, it has ballooned to well over $1 trillion.

“We have the tariffs from Trump and Biden, and they did not lower the trade deficit,” said Simon Lester, an international trade lawyer and founder of WorldTradeLaw. “If for some reason lowering the trade deficit is a concern for you, raising tariffs is not going to get you there.”

One simple explanation for what happened is that despite a raft of tariffs on goods made in China, many of those firms just migrated to other countries with lower tariffs for exports to the United States. While the U.S. trade deficit with China has fallen by about $67 billion since 2016, the U.S. trade deficit just with Mexico and Vietnam has risen by a combined $161 billion in that same time.

Those imports didn’t stop coming to the United States, Lester noted. “They just came from other low-wage countries” that aren’t subject to the same restrictive tariffs as China.

Tariffs didn’t act as a cudgel to open markets for more U.S. goods, either, at least under Trump. U.S. goods exports were lower at the end of his term than at the beginning. (U.S. goods exports subsequently rose about 40 percent in the next three years, including during the second year of the COVID-19 pandemic.)

But tariffs still bring headwinds for U.S. manufacturers. The Trump administration’s tariffs on steel and aluminum, for instance, did curb imports of both, but they also led to much higher domestic prices for the metals than in the rest of the world. The China tariffs, many of which are still in place, fell disproportionately on intermediate goods that U.S. firms use to make other things, raising costs and eroding competitiveness. That would likely only get worse with steeper tariffs.

The bigger challenge with an adversarial trade policy, experts say, is that it will make it harder for Washington to rally allies in Europe and Asia to help contain and roll back coercive behavior from China and Russia. That’s bad enough with Europe, where trade tensions could land on top of Trump’s criticism of NATO and indifference to Russian aggression. But it could be even worse in Asia.

Trump in his term immediately pulled out of a planned Asian trade deal that was meant to offset China’s economic and geopolitical heft in Asia. China itself now may join that grouping even as the United States stays out, while Beijing is simultaneously leading its own separate trade partnership in the region, known as RCEP, to intensify economic and geopolitical ties with Asian countries.

“If he raises tariffs, including on allies, it is going to become difficult to work with them to gain their support and backing for working to deal collectively with the challenges that China poses,” Cutler said.

That could make a full-on trade war with China itself doubly problematic, especially with geopolitical tensions already high between Washington and Beijing over Taiwan and the balance of power in Asia.

“At a time when we are trying to stabilize things, the trade part of the relationship, which has been difficult but not as adversarial as it was, that could spill over,” Cutler said.