Rights and Wrongs: Trying to Understand Trump’s Trade Policy

The United States is stepping back from its role as the leader of the global trade system with a rhetoric about America being “looted” and “pillaged.” However, the underlying truth is that globalization, often propelled by non-market forces, hollowed out some of America’s manufacturing. Still, that doesn’t excuse the administration from making strategic mistakes, which may be irreversible. ITIF’s analysis below details what the Trump administration has gotten right and what it has gotten wrong in the weeks since the “liberation day” tariffs.

What Trump has gotten right:

▪ America’s Reindustrialization: Instead of listening to comforting views that the United States is the second-largest manufacturer in the world, the Trump administration correctly identified this sector as a critical asset in global techno-economic competition. Since the early 2000s, America has lost market share in all 10 strategic industries assessed in ITIF’s 2023 Hamilton Index report, except IT services, while China currently leads globally in seven of them.

▪ Correcting Trade Imbalances: The Trump administration is correct in seeking to remediate trade partners’ barriers and attacks on the United States. Even long-standing allies have adopted policies that disadvantage American exports and companies, including regulations that target U.S. firms, weak intellectual property rights protections, and other non-tariff barriers (NTBs). Ultimately, these trade impediments have weakened the American economy.

▪ Working to Reduce the U.S. Trade Deficit: The United States has run a trade deficit nearly every year since the early 1970s. While the trade deficit per se would be acceptable if balanced over time, America’s trade deficit has amounted to nearly $7 trillion in the last 10 years. From 2001 to 2023, the United States accumulated a $6.4 trillion trade deficit in goods with China. America’s trade disparity over that period includes a $2.2 trillion deficit in advanced technology products. Indeed, many of these deficits have come at the expense of the United States’ manufacturing base.

▪ Distinguishing China From Typical Trade Policy: While “liberation day” tariffs treated friends and foes alike, the United States partially amended this a week later by imposing nearly de facto export controls on China. America’s effort to counter China’s mercantilism would be more effective as a collective initiative with allies, but the 90-day pause on tariffs at least points in the right direction.

▪ Acknowledging WTO Shortcomings: China has systematically broken its World Trade Organization (WTO) commitments—it has subsidized its industries, stolen intellectual property, forced technology transfer, and overproduced to dump its products into foreign markets. All while self-declaring as a developing economy to obtain preferential status under the WTO. It’s clear that this multilateral framework was insufficient to address such a scofflaw.

What Trump has gotten wrong:

▪ Failing to Focus on Strategic Industries: While tariffs were introduced to reverse deindustrialization, not all sectors are relevant to the techno-economic competition with China. Tariffs might help revive non-strategic “potato chip” manufacturing, but they do little to encourage high-tech innovators to export from the United States. In addition, the Trump administration has tried to cut funding for Manufacturing Extension Partnership (MEP) centers, gutted R&D investment, and disrupted strategic manufacturing supply chains, such as the one with Canada and Mexico (USMCA).

▪ Undermining Alliances: Treating allies the same as adversaries only drives them closer to each other. Instead of attempting to build an economic bloc of like-minded countries, led by American innovation, the Trump administration has burned bridges. Unless the administration can deliver significantly revised trade deals with core allies such as the European Union, Japan, South Korea, and the United Kingdom (among others), it risks losing the trust of an entire generation of Western leaders. Alienating or antagonizing allies and non-aligned nations only drives them into China’s camp. If that continues, China will win the techno-economic competition, leaving the United States relegated to a “hewer of wood and drawer of water.”

▪ Using Tariffs as an End in Themselves: If one has a hammer, all one sees are nails—the Trump administration seems to assess that tariffs can solve everything. The administration has continually shifted its rationale for tariffs—from migration and fentanyl to manufacturing, revenue generation, and trade deficits with both allies and adversaries. This shifting rationale reveals that few of these justifications were very sound to begin with. Tariffs are far from the only available tool to correct trade imbalances. China aside, the Trump administration could have opted for a mix of instruments, such as export promotion, import bans based on the USITC’s Section 337 provisions, seeking diplomatic channels and trade renegotiations, and transitory tariffs in extreme cases, as the United States did in 1987 with Japan.

It is unclear what will follow the rebalance of the global trade system. What is certain is that China wants to rewrite the rules. The Trump administration must understand that the global economy is moving toward a future where China will set the standards. America alone cannot contain it.