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US-China relations
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Stephen Roach
Stephen Roach

Opinion | The inherent flaw in Trump’s trade policy

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

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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
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.

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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.
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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.
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