Trade War State of Play: China, USMCA

If President Trump’s trade war has a single takeaway, it is this: Raising tariffs is an ineffective bargaining strategy. When the U.S. raises its tariffs, other countries always retaliate, and always become less cooperative. Trump’s tariff-heavy bargaining strategy is harming both of his top trade priorities, China and the new NAFTA/USMCA trade agreement.

Right now, the big news is another round of tit-for-tat in the U.S.-China dispute. On the night of Sunday, May 4, right before a week of high-level negotiations, President Trump threatened a 25 percent tariff on $200 billion of Chinese goods if the two governments did not reach an agreement by the following Friday, May 10.

Trump has made drastic last-minute threats in the past as a tactic to speed up negotiations and move them in his favor. Sometimes he follows through. But often he withdraws, as when he recently threatened to shut down the U.S.-Mexican border and quickly backed off. He considers it an advantage for such follow-through to be unpredictable.

This time he followed through. But the Chinese government did not accede to his demands. Instead, it is raising its own barriers against U.S. products. Every one of Trump’s tariff increases so far has been met with retaliation, not cooperation. The strategy does not work.

Another round of trade talks is likely in the next few weeks. President Trump, in line with his established strategy, is mulling extending tariffs to all Chinese imports if matters are not settled soon. It is safe to predict that another tariff will garner the same response as all of its predecessors. The pattern was set long ago. With Trump unlikely to change his stripes, it is well past time for Congress to retake the taxing authority it delegated away to the president back in the 1960s and 1970s. Absent such reform, the U.S.-China trade war could be long-term.

China is not the only dispute in which Trump’s tariffs are blocking his goals. The president’s top domestic priority is passing the new NAFTA/USMCA trade agreement. The biggest remaining sticking point there is Trump’s steel and aluminum tariffs. These are meant in part to get Mexico and Canada to acquiesce to U.S. negotiation demands. Instead, the tariffs are causing holdups and resentments in both countries— and in Congress.

For legal reasons, the tariffs were enacted on national security grounds. Mexico and Canada are both offended that a close ally is publicly calling them national security threats. They are withholding cooperation. Back home, many congressional Democrats and even some Republicans want the steel and aluminum tariffs repealed as a condition for ratifying the agreement. Trump, so far, is unwilling to agree. Members of Congress are also using tariff repeal as a bargaining chip for non-trade issues where the president needs congressional cooperation. This could stymie administration agenda items well outside of trade.

President Trump has two options going forward. He can double down on his mistakes, or he can change to a strategy that does work. A positive change would involve repealing the problem-causing tariffs, reengaging the World Trade Organization’s dispute resolution process, and re-joining the Trans-Pacific Partnership. Of course, such a change would require significant creativity in PR framing in order to save face on Trump’s end, but smart diplomats on all sides can find ways to do so.

Unfortunately, the president is committed to his tariff strategy and likely will continue to double down on failure. This creates an important role for both parties to play. Democrats need to check an executive branch run amok and affirm their principles of dynamism, openness, and economic inclusiveness. Republicans from the free-market wing of the party need to give their longstanding principles a higher place than they currently give to an outlier personality who will disappear from the political scene in 2025 at the latest.

This post has focused mostly on political strategy. It is well-established that tariffs are even more harmful to the U.S. economy than they are to U.S. foreign policy interests.

For more on that side of the issue, see Iain Murray’s and my study, “Traders of the Lost Ark.”