Trump tariffs put global economic order at stake

As of March 4, merely over a month after Donald Trump assumed office as President of the United States, he had announced several executive orders imposing increased tariffs on many countries, including Mexico, Canada and China, and plans to levy reciprocal tariffs on all trading partners.

While the outside world had anticipated Trump's tariff war 2.0, the speed at which it is being implemented and its extensive scope have exceeded everyone's expectation.

The Trump administration has arbitrarily used tariffs as a tool of pressure in a rampant manner, undermining the orderly policy environment on which global trade and investment have relied since World War II. This has dragged the world into a quagmire of mercantilism, with possible consequences that are both damaging and disruptive.

US new trade policy: aggression and coercion

The trade policy of Trump administration 2.0 is characterized by strong aggressiveness and coerciveness, which makes full use of the interdependence between most countries and the US, as well as its unique position and leverage in the global economy.

According to Statista data, as a major consumer and producer of goods, the US' total export volume in 2022 exceeded US$2 trillion, accounting for 8.5 percent of global exports, ranking second in the world. The US is also the world's largest importer of goods, with an import volume of about US$3.38 trillion, or 13.2 percent of global import volume. Moreover, the US remains the leading destination for global direct investment, maintaining a steady growth in foreign capital inflows even in recent years.

According to SWIFT data, most global commodity trade is still priced and settled in US dollars, with the American currency accounting for over 80 percent of trade financing. Thus when the US espouses a package of protectionist measures, such as imposing additional tariffs, sanctions, technology bans, and investment restrictions, the global economy will feel a straight punch.

Since the beginning of Trump's first term, US foreign trade policies have shown a strong aggressive tendency, with Washington waging step-by-step trade wars on contrived pretexts against those trading partners it deems to be a threat or benefiting unfairly.

The US has increasingly adopted an arbitrary narrative to justify its trade wars, whether by citing so-called concerns for forced technology transfers under Section 301, resorting to general criticisms of unfair trade practices, or more recently, launching accusations using the fentanyl issue as a pretext. This arbitrary approach has violated the US' commitments to abide by bound tariff rates as a World Trade Organization member, and the strict conditions for applying trade remedies. It even goes against basic economic logic.

In the Trump 2.0 era, such aggression has become more frequent and widespread. It no longer provides affected companies with a grace period or offers a basis for determining relevant tariff rates, and it explicitly rejects any tariff exemption requests.

All these proactive attacks are aimed at achieving trade deals that meet Trump's demands, using trade pressure to coerce the other party into making concessions to the US on political, economic, and even resource-related issues.

After announcing a 25 percent tariff on Mexico and Canada after Trump took office, the US delayed its implementation by a month in order to force these two countries to comply with demands on such issues as immigration, relations with China, etc.

Moreover, according to previous agreements, the United States-Mexico-Canada Agreement (USMCA) was supposed to be reviewed in 2026, but Trump leveraged tariff hikes to push for an earlier review, hoping to adjust the preferential treatment for the two neighboring countries under the agreement.

Elsewhere, TSMC recently announced a plan to invest US$100 billion in the US, which was acknowledged by the country as a quid pro quo offered by the chip company to avoid potential tariff increases. Moreover, the US' demands regarding the Panama Canal, Greenland, and even minerals of Ukraine now at war are prime examples of this coercion strategy.

A production economy: a false proposition

In March, US Trade Representative Jamieson Greer delivered the 2025 Trade Policy Agenda to Congress, emphasizing a shift toward a "production economy" and an "America First" trade policy.

This trade policy agenda continues to exaggerate the crisis facing the US economy, saying the US cannot focus solely on consumption but should be oriented around the production of manufactured goods, agricultural products, services and knowledge, ensuring that trade policies favor a production-driven economy.

In reality, the US is the world's largest exporter of services and the top destination for investment. American manufacturing benefits from global capital and intermediate goods supply, while the US services trade consistently maintains a surplus, reflecting support from global consumption.

Meanwhile, US multinational corporations harvest investment profits worldwide, not to mention – with continued appreciation of the US dollar – global capital flows into the US that push the market value of American companies to unprecedented heights.

Inflation and income inequality observed in the US in recent years are domestic problems that cannot be solved by trade policy. The middle-class and working-class Americans, who the Trump administration suggests would benefit the most from these trade policies, will soon face even higher inflation and increased household expenditures.

The idea of the US returning to manufacturing, or the so-called "production economy," is a false proposition. It assumes that production economies are superior to consumption-based ones. If this were true, the countries being attacked and coerced would not be Canada, Mexico, Brazil, India, China, or certain others (as mentioned in Trump's speech to Congress), because their production-based economies should be able to challenge the consumption-based economy of the US.

The trade policy agenda also mentions that the wage premium for manufacturing jobs is about 10 percent, implying that production-based economies are high-wage economies, and that outsourcing production has deprived workers of high-paying jobs.

These arguments contradict basic economic principles. Moreover, despite the impact of the pandemic, US employment data has remained robust in recent years, and it's Trump's government reforms that have directly caused some new unemployment.

It is important to note that the protectionist policies the US is implementing or will soon implement will put more people in developing countries and least developed countries at risk of unemployment.

Even if the US aims to revive its manufacturing sector, an "America First" trade policy will not help achieve this goal. Imposing trade restrictions will weaken the efficiency gains from specialization, limit economies of scale, and reduce competition, further decreasing domestic innovation incentives. Sweeping tariff increases will directly raise the cost of US manufacturing and may even lead to supply disruptions.

Tariffs will increase downstream consumer prices, and if retaliatory tariffs are imposed by targeted trading partners, they could harm a country's exports. Export controls will reduce the revenue needed for exporters to reinvest in developing the next generation of products and will encourage import substitution in the importing country, which is highly detrimental to exporters.

For example, US auto manufacturing benefits from the supply of raw materials and intermediate goods from Canada and Mexico. After announcing a 25 percent tariff on Canada and Mexico, the US had to backtrack and adjust tariffs on the automotive sector. Many experts point out that, unlike in Trump's first term, allies like Canada, Mexico, and the European Union have clearly indicated or are considering retaliatory measures.

Widespread retaliation will worsen the export environment for the US' manufacturing sector. Who will buy American goods that feature high input costs and high wages?

Crisis of the global economic order: betrayal by a core power

The greatest negative impact of Trump's trade policy is the fundamental destabilization of the global economic order, which will directly increase the risks and uncertainties in international trade and investment.

Adhering to existing legal frameworks is crucial to maintaining trust between nations in trade, investment, and monetary-financial systems. The US' betrayal as a core member of multilateral organizations, including the WTO, will accelerate the world's fragmentation and cause chaos, with a potential to trigger the worst conflicts.

In recent years, decoupling and supply chain disruptions have produced complex and profound effects, directly intensifying domestic power struggles. The reduced interdependence is pushing the risk of rising populism beyond the economic realm. The ongoing trade wars, with broad imposition of high tariffs, signify higher costs and uncertain geopolitical risks for both importers and exporters.

The WTO's 2023 World Trade Report introduced the concept of "re-globalization," which seeks to bring more populations, economies, and urgent issues into the global trade framework and strengthen multilateral cooperation as a vital path for addressing global problems.

The report points out that trade has proven to be a source of security and peace, a driver of poverty reduction, and a key tool for addressing climate change. It argues that due to the far-reaching spillover effects and externalities of domestic economic choices and policies, re-globalization is a more effective solution to global challenges than fragmentation. This cooperation requires the commitment and contribution of core members.

In stark contrast to the US 2025 Trade Policy Agenda, the recently released Chinese government work report once again emphasized the importance of "expanding high-level opening-up and promoting mutually beneficial cooperation." The report said specifically that the Chinese government aims to "comprehensively and deeply engage in WTO reforms, promote the construction of an open global economy, and allow the outcomes of win-win cooperation to benefit people in all countries."

In the past few years, the world economy has found itself slowly recovering from the combined impact of global pandemics and geopolitical conflicts, with most countries facing growth pressures. At such a time, core powers should responsibly take a leading role in promoting common development and shared prosperity.

More countries should stand up to the US government's capricious and coercive trade policies, so as to jointly prevent the global economy from sliding into disorder.

(The author is director of the Institute for World Economy Studies at the Shanghai Institutes for International Studies. Wang Yong translated it from Chinese.)