ASPI USA roundtable: Trying to understand US economic statecraft
Governments are outraged, industry leaders are keeping a low profile, and economists and analysts are confused as they work to understand how the Trump administration’s approach can make the United States simultaneously safer, stronger and more prosperous.
In its first month, the Trump administration has shaken up the world trading system as it uses tariffs to try to promote US investment, productivity, industrial and technological advantage; defend US economic and national security; and help US workers.
An ASPI USA discussion with Claire Chu, Aaron Glasserman, Kimberly Donovan, Phil Rogers and William Alan Reinsch this month focused on what this approach means for US-China relations. This is the first in ASPI USA’s series of Chatham House roundtables to consider the Trump administration’s approach to geoeconomics.
The administration has imposed a 10 percent general tariff on Chinese imports, adding to economic measures established under the previous Trump and Biden administrations.
It has threatened to impose 25 percent tariffs on aluminium and steel not made in North America, reciprocal tariffs on all countries, 25 percent tariffs on automobile imports, and tariffs of at least 25 percent on pharmaceuticals and semiconductors. The US will also place 25 percent tariffs on imports from Mexico and Canada, unless these countries can further appease Trump. This is all before considering retaliatory tariffs levied on the US.
If a country adds a tariff to protect an industry, it does so by making foreign goods more expensive and domestic goods relatively more attractive. If the protected local companies then enjoy a larger market, they may expand their workforces.
But tariffs could also lead to job losses in non-protected industries. When companies pay more for imported inputs, they may pass on the higher cost to consumers. They may shrink their workforces, too. Costs would rise for US imports with no domestic alternative, affecting businesses downstream. For example, placing a tariff on coffee would increase prices for cafes. This might then affect bakeries that supply the cafes, as some consumers decide not to buy coffee.
The administration wants businesses to invest in domestic manufacturing, but this will take time. Tariffs and export controls, together with incentives, have led to reduced US investment into China, with some returning to the US. However, Donald Trump has questioned the value of mechanisms incentivising business to relocate. He suggested he might abolish the CHIPS and Science Act, a law that provides funds and incentives for semiconductor research and production in the US. He has also paused disbursement of grants under the Inflation Reduction Act, which seeks to do the same with renewable energy.
Broad tariffs increase production costs, which in turn inflate consumer prices. They also undermine US export competitiveness by increasing production costs and strengthening the dollar, leading to inflation and fewer jobs in the short to medium term.
The US must also consider how applying tariffs on allies and partners will affect its reputation. Imposing tariffs on any country the US perceives as having an unfair trade deficit, including when this is for a single sector within a broader trade surplus (for example, aluminium from Australia), signals a shift toward purely transactional economic relationships.
An apparent US disregard for decades of strategic and security cooperation will erode trust in US leadership, particularly among allies. This will reduce its ability to rally international partners for broader strategic objectives.
The proposed tariffs might also affect the US’s ability to counter China in the Indo-Pacific, particularly regarding Taiwan. Tariffs on Taiwanese goods, targeting its world-leading semiconductor industry, could impact Taipei’s calculus about whether its alignment with the US is in its best interest.
US tariffs could also affect Taiwanese public opinion, influencing voters to reconsider the viability of self-determination and strategic alignment with the US. This would be a gift to China as it works to lure Taiwan to unite with it.
The loss of Taiwan would undermine US national security; isolate key US allies and trade partners; make the 80 percent of global trade that passes by Taiwan and the South China Sea vulnerable to Chinese manipulation; and reduce US commercial access to 60 percent of global GDP.
Further, the Trump administration’s use of economic measures to elicit political outcomes—such as against Mexico to get action on the southern border or Columbia on illegal migrants—undermines its ability to call China out when it does the same.
Campaigning for election, Trump and his supporters boiled his trade proposals down to creating jobs and lowering prices, which would make the country safer, stronger and more prosperous. If the above principles of economics stand, then we must ask why the administration is using tariffs in contradictory ways.
At the roundtable, some experts pointed to Trump’s long-held view that allies and adversaries had taken advantage of the US for decades on trade and security. Others noted that with the national debt at more than US$36 trillion and still climbing, Republicans were willing to back Trump’s deal-making skills to lift revenue and get more favourable trade and political outcomes. While Elon Musk’s effect on trade policy was unclear, maybe the tariff on China being set at 10 percent instead of the foreshadowed 60 percent was because of his investment in the country.
At this stage, it is hard to see a strategy behind the tactics being employed.