One of the many explanations offered for Trump’s fondness for tariffs is that they serve as a strategic bargaining chip, aimed at persuading the rest of the globe to play fair with American businesses. The narrative suggests that U.S. companies face a barrage of high trade and non-trade barriers, and these tariffs are designed to demonstrate that “we mean business,” compelling other nations to the negotiating table.
Let’s entertain this rationale for a moment. In theory, if tariffs are temporary and designed to lower barriers, then perhaps they could be justifiable. However, as economists since Adam Smith have pointed out, the effectiveness of such a tactic hinges on the negotiator’s prowess. Historical evidence from Trump’s first term does not paint a rosy picture of his negotiation abilities.
During Trump’s first term, two significant trade agreements emerged:
- the resolution of the trade war with China that he initiated
- the reworking of NAFTA, now known as the US-Mexico-Canada Agreement (or USMCA, affectionately dubbed NAFTA 2.0)
Let’s dissect each of these agreements.
Firstly, the trade war with China stands as a colossal defeat. Even when considering tax revenue—which merely shifts wealth rather than creating it—U.S. welfare declined post-trade war (see here, especially Section 6, for a detailed discussion and various welfare estimates).
Moreover, the trade war resulted in permanently elevated tariffs. Both U.S. tariffs on Chinese imports and Chinese tariffs on U.S. exports are now significantly higher than prior to the trade conflict. According to Dr. Chad Brown of the Peterson Institute for International Economics, before the trade war, U.S. tariffs on Chinese goods hovered around 3%, while Chinese tariffs on U.S. goods were about 8%. After the trade war, Chinese tariffs on American products surged to roughly 21%, with U.S. tariffs on Chinese goods following suit. To add insult to injury, prior to the trade war, only about 1% of American exports to China faced tariffs; that figure skyrocketed to 58% afterward. If the trade war’s goal was to open China’s doors to American enterprises, it was a spectacular flop.*
Next, the renegotiation of NAFTA has drawn sharp criticism from Trump himself, who claimed it allowed Canada and Mexico to exploit American manufacturers. “Who would sign something like this?” he lamented. Ironically, he was the one who signed it. The USMCA was touted as a triumph during his first term. Yet, in his view, his own negotiated agreement fell short. The paradox is that the USMCA is, in fact, quite a decent arrangement—essentially a rehash of NAFTA with minimal alterations. But in Trump’s eyes, it was a failure.
Thus, Trump’s track record in trade negotiations, when assessed both quantitatively and qualitatively, is dismal. So, what can we infer from this?
Curiously, Trump has shown that he can be an effective negotiator in other arenas. His administration achieved significant diplomatic milestones, such as the Abraham Accords that fostered relations between Israel and several Arab nations. However, his emotional impulses often overshadow rational decision-making, particularly in trade discussions. If Trump could temper his approach in trade negotiations, he might successfully lower tariffs and stimulate commerce. Unfortunately, he harbors a fundamentally flawed understanding of trade. His mercantilist obsession with trade deficits leads him to perceive trade as a zero-sum game, where one country must “win” at the expense of another. It’s quite challenging to negotiate effectively on a subject one fundamentally miscomprehends—like trying to haggle over the price of a car without grasping what a car is meant to do.
*The notion of decoupling—essentially extricating U.S. businesses and trade from China—is sometimes posited as a rationale for the trade war, but that too has proven unsuccessful. The aftermath of the trade war saw negligible decoupling.
