appConfigEntityId

bodyType

customContents

entityId

entityUuid

isVideo

articlePageQuery

article

articleSchemaContent

content

hooksArticlePageAdvertisementConfigArticle

hooksArticlePageFloatingButtonConfigArticle

appConfig

filter

json

liveArticle

Stephen Roach

There is an inherent flaw in US President Donald Trump’s trade policy. While it is all but impossible to know where Trump will settle on most issues – from taxes to immigration – two key objectives of his trade strategy are now coming into focus: setting a global minimum tariff and imposing a special penalty on China. The flaw lies in the combination.
For argument’s sake, consider the possibility that a blanket 10 per cent tariff on all US trading partners is America’s new norm. Trump has loudly proclaimed that such a baseline is minimal compensation for the “rip-off” the United States has long suffered from other countries’ unfair trading practices.
Never mind that this rationale ignores the many benefits that the US has reaped from trade – not just cheaper goods and expanded consumer purchasing power, but also the foreign capital inflows that subsidise US interest rates and, in turn, help create financial wealth.
Trump is fixated on the “carnage” of seemingly chronic trade deficits, especially the alleged hollowing out of America’s once-great manufacturing sector. Be that as it may, the significance of going from an effective US tariff rate that averaged just 1.8 per cent between 1995 and 2024 to a new floor of 10 per cent cannot be overstated.
True, this 8.2 percentage-point rise is only slightly larger than the 6.3 percentage-point increase in effective tariffs that occurred from 1929 to 1933, following the enactment of the infamous Smoot-Hawley Tariff Act of 1930. But a 10 per cent baseline tariff would represent a 445 per cent increase from the low-tariff regime of the past three decades, whereas, under Smoot-Hawley, tariffs rose a mere 47 per cent from 1929 to 1933.
Moreover, this new baseline would be applied at a time when goods imports account for 12.2 per cent of US gross domestic product, almost three times their 4.3 per cent share in 1929. In other words, there is nothing minimal about a new 10 per cent tariff floor – it would represent a major shock to the US economy.


The second key component of Trump’s trade policy is the “China penalty”. Currently, Chinese imports are subject to a 30 per cent tariff – triple the rate imposed on almost all other countries. Inasmuch as this premium is fentanyl-related, it could decline significantly if the US and China come to an agreement on restricting precursor chemicals.
But even in the event of a breakthrough on fentanyl, the Trump administration and Congress share strong agreement on the need to inflict a special penalty on China for what they see as its outsize contribution to America’s gaping foreign-trade deficit.
This reflects the standard allegations of unfair trade practices, as well as heightened national-security concerns. That many of these claims are based on false narratives seems of little concern to policymakers in Washington, where being tough on China is now a rare point of bipartisan consensus.
Significantly, the twin pillars of Trump’s trade policy, a global minimum tariff and an additional China penalty, are likely to come as a package deal. The danger of this approach is greater than the sum of its parts.




The main risk to the US economy is increased trade diversion away from China – a low-cost producer – to higher-cost countries. While this occurred after Trump first imposed tariffs on China in 2018-19, it may have even more damaging effects now as the president’s so-called One Big Beautiful Bill Act is likely to increase the federal budget deficit, depressing domestic savings even further.
That would widen America’s multilateral trade deficit, with the bulk of the increase comprising more expensive imports, all of which have been hit with a fivefold increase in effective tariffs. Fixated on continuing to blame China for its outsize trade imbalance, the US will be incurring an even greater global penalty.
An added complication is that Trump’s trade policy is likely to lead to America’s decoupling from China-centric supply chains. The deglobalisation caused by “friendshoring” is likely to raise the costs of foreign production, assembly and distribution, resulting in sharp price increases for US consumers. With growth under downward pressure and inflation risks shifting to the upside, the threat of US stagflation will only grow.


China’s experience will be the mirror image of America’s. Its export-led economy will take a direct hit from the tariffs imposed by its largest trading partner. Moreover, China faces the distinct possibility of renminbi appreciation, which would exacerbate its recent outbreak of deflation.
While the Chinese government will undoubtedly respond to these pressures by underscoring the need for consumer-led rebalancing, the odds of an immediate shift in consumption patterns are low. That will leave the Chinese economy increasingly dependent on exports rather than domestic demand, which in turn implies more investment in technology-intensive “new quality productive forces”, adding more fuel to a protectionist backlash in the US.
None of this is good news for a softening world economy that is already feeling the pressures of a tariff-induced slowdown in global trade. With China and the US together accounting for a little more than 40 per cent of global GDP growth since 2010, the risk of a worldwide recession will only rise if Trump keeps pushing his unworkable trade formula.
Copyright: Project Syndicate


From body language to ping-pong, decoding the symbolism during Xi and Trump’s meeting

How Kenya’s sacred Mrima Hill became new front in US-China minerals rivalry

Why Xi Jinping skipped the UN after his Trump summit

Beijing says US, China to pursue military crisis-communication pact

US-China relations

The inherent flaw in Trump’s trade policy

A woman shops for car seats, all made in China, at a Walmart in Rosemead, California, on April 11. US consumer inflation cooled slightly in April, but analysts warned prices could spike in the coming months as businesses grapple with US President Donald Trump’s sweeping “Liberation day” tariffs. Photo: AFP

Will Trump’s high-stakes tariff gamble pay off?

US President Donald Trump gestures during a business roundtable in Doha, Qatar, on May 15. Photo: AP

Truth in the truce: Wendy Cutler mulls if US-China trade can find lasting peace

Illustration: Lau Ka-kuen

Money talks and Trump should pay attention to Asia’s bond markets

US President Donald Trump is seen on a television screen while a trader works on the floor of the New York Stock Exchange in New York on May 12. Photo: EPA-EFE

Opinion

World Opinion

Economy

Global Economy

Trump’s twin goals of a global minimum tariff and hurting China could damage both the US and Chinese economies and spark a global recession


Trump’s twin goals of a global minimum tariff and hurting China could damage both the US and Chinese economies and spark a global recession.


US-China trade war

Trade

Donald Trump’s China policy

China

United States

Donald Trump

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


The inherent flaw in Trump’s trade policy

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Trump’s twin goals of a global minimum tariff and hurting China could damage both the US and Chinese economies and spark a global recession

Trump’s twin goals of a global minimum tariff and hurting China could damage both the US and Chinese economies and spark a global recession