President Donald Trump’s decision to raise tariffs on friends and foes and the retaliatory actions taken by some trading partners have taken the world to the precipice of a full-blown trade war. Some tariffs are paused as Trump uses the threat of additional tariffs to extract what are being billed as new “trade deals” from countries willing to negotiate. US federal courts have also entered the mix, ruling that the president has exceeded his legal authorities to impose some of his most sweeping tariff actions. Those cases are likely headed for the US Supreme Court.
For all the economic uncertainty these on-again, off-again tariff actions have created, focusing on a series of bilateral “trade deals” is a missed opportunity to reduce global trade barriers to US exports and provide durable benefits to the US economy. Instead, the president should seek authorization from Congress to negotiate trade deals and convene countries in a Trump Round of global trade negotiations to reduce tariffs and nontariff barriers on a most-favored-nation basis. The trade negotiations would take place on a more secure legal footing, given the critical role Congress is supposed to play in trade policy under the US Constitution and the ongoing litigation. Moreover, such a new trade round could be the most effective way to address the challenges presented by China’s export of manufacturing overcapacity. Success here could be a signature achievement for Trump’s international economic diplomacy and deliver a reformed trading system that works for the US and the world.
How We Got Here
In the first months of his administration, the president raised tariffs on China to 145 percent, only to drop them to 30 percent (which are on top of existing duties previously imposed). He also imposed 25 percent duties on Canada and Mexico, subsequently paring them back for items that qualify under the US-Mexico-Canada Agreement (USMCA). On April 2, he published a list of prohibitive reciprocal tariffs on the world before pausing them for 90 days, leaving a global 10 percent tariff in place as his administration contemplates ”trade deals.” A global tariff –increased from 25 percent to 50 percent –on steel and aluminum and 25 percent on automobiles and automobile parts have been levied. Other tariff actions in sectors such as pharmaceuticals, semiconductors, critical minerals, copper, trucks, lumber, and jet engines are underway. Additional threats of tariffs against key US trading partners persist.
By applying tariffs on countries with whom the US has free trade agreements, contrary to US WTO commitments, Trump has undermined trust in the US, thereby devaluing existing and future trade agreements. Reduced trust raises the risk premium for investing and trading with the US. At the same time, US tariffs and the uncertainty caused by Trump’s on-again, off-again approach to trade policy has caused businesses to pause, not increase, investment in the US. In May, consumer sentiment about the US economy was down over 30 percent compared to the same time last year, and according to most economists, a US recession is increasingly likely this year.
So far, at least, the US has gained little from upending the global trading system and eroding trust in the country. The rapid conclusion of “trade deals” promised by the administration has not occurred. Instead, the US has only outlined a preliminary deal with the UK and arrived at a temporary truce with China in which both sides have agreed (and recently reaffirmed) to hold their fire and reduce tariffs for 90 days. New trade deals with India, Japan, Vietnam, and others could happen in the next weeks and months. However, as we’ve seen with the US-UK and China talks, whatever additional deals are announced are likely to be nonbinding statements of intent that fall well short of final deals—where all the hard work will still have to be done. It will thus be some time before it can be determined whether the costs of Trump’s tariffs have been worthwhile.
What the US Should Avoid in New “Trade Deals”
Given the president’s belief that bilateral trade deficits are evidence the US is losing out from trade, we anticipate that Trump will demand that potential trade partners commit to purchase additional US goods. This has already occurred in the US-UK “deal” with the UK committing to buy a few billion dollars’ worth of US beef, ethanol, and airplanes. These purchase commitments were a core element of the US-China Phase One deal, where China agreed to purchase over $200 billion of US goods. This approach failed: China never met its commitments, and neither the Trump nor Biden administration enforced the deal. We forecasted this result in 2020, when the deal was first concluded.
Purchase commitments in new “trade deals” will also not deliver for the US. They are the wrong tool for opening markets and delivering sustainable longer-term gains. First, purchase commitments require a government to intervene in the market, distorting supply and demand. No market economy should make purchase commitments. Instead, Trump should focus on getting countries to remove trade barriers—level the playing field—in the expectation that US exports will grow when allowed to compete.
Second, purchase commitments give other countries leverage over the US. Because many US exports are fungible (e.g., agriculture) or have global substitutes (e.g., machinery), purchase commitments tie US exporters to specific governments, giving these governments the ability to turn off these purchases of US exports for any reason.
Third, any agreement modeled off the Phase One deal will be hard to enforce. Recall that the Phase One deal contained bilateral dispute settlement mechanisms that have never been exercised either by Presidents Trump or Biden—even though China did not uphold its purchase commitments. It’s very likely that any such deals cut by the Trump administration will suffer from the same flaws.
Fourth, purchase commitments are discriminatory, undermine the global trading system, and—by requiring that other governments purchase more from the US and less from other countries—risk further friction with allies and friends. It is one thing for a US company to out-compete a British or Japanese company in, for example, Vietnam. It is another when US “trade deals” require that outcome. This aspect of purchase commitments undermines the long-standing international trade norm of nondiscrimination—the same norm that animates US efforts to reduce trade barriers so that US exporters can compete. For many countries, purchase commitments demanded by the US will breach their own trade commitments with other nations: Many governments have agreed not to discriminate in trade and would be required to extend preferential treatment to other trading partners. For a case in point, see the questions the EU has already raised about the compatibility of the US-UK deal with global trade rules.
The Trade Deal Trump Should Aim For
Considering the significant challenges to concluding dozens of bilateral “trade deals”, we suggest an alternative, ambitious path forward—one that would maximize the leverage that Trump has built with his tariffs to reset the global terms of trade to benefit the US and the globe.
Step 1: Work with Congress to Pass Trade Promotion Authority
To date, Congress has largely been supine on international trade issues, but it undoubtedly plays a critical role. Under the US Constitution, Article I grants the authority to Congress to conduct trade with foreign nations and levy duties. For historical reasons, Congress has delegated these constitutional authorities to the president. The deals that resulted, however, needed to be negotiated in line with priorities agreed on by the president and Congress and then voted on by Congress through a fast-track process, known as Trade Promotion Authority (TPA). This back-and-forth dance between the president and Congress has traditionally created a predictable trade and tariff environment for the US and global economy. The recent decisions of US federal courts have found that tariffs imposed under the International Emergency Economic Powers Act, a national security statute, exceed legal authorities granted to the president by Congress, only highlighting the important interplay between the branches of government in this regard.
With GOP majorities in Congress, President Trump is well placed to seek TPA. Failure to get TPA and work with Congress to pass any trade agreement means that any new “trade deal” could only be established through an executive agreement, which could be overturned or ignored by future presidents. The court decisions have also underscored the potential limits of presidential authorities on trade issues under US law. US trade partners know this and, until the US signals a determination to get these deals passed by Congress, will similarly treat any deals as potentially short-lived (in addition to all the reasons discussed above). The economic benefits for the US will also be limited as trading partners are incentivized to limit market access and overpromise on unenforceable purchase commitments in anticipation of these deals being overturned or revised once Trump is out of office.
Step 2: Use Leverage with Trading Partners to Create Real New Market Access for US Exporters
The US has taken over 30 years to negotiate comprehensive free trade agreements with twenty countries. The US will not be able to negotiate meaningful new trade agreements in 90 days. Trump’s preference for bilateral negotiations makes sense when focused on a limited number of trading partners, given sufficient time.
However, because Trump has raised tariffs on much of the globe, he should instead convene global trading partners either at the (dare we mention) World Trade Organization (WTO) or separately in a Bretton Woods-style framework for a “Trump Round” of trade negotiations. In this scenario, Trump could aim to bring down global tariffs on a most-favored-nation basis and address a host of nontariff barriers. This could be combined with efforts to advance proposals, in concert with US allies, to target large surplus countries such as China and require them to rebalance their economies to increase consumption and reduce subsidies—or risk being excluded from the new trading system. Such a strategy could notably push China to focus on domestic reforms that include implementing its WTO commitments.
China has repeatedly in recent months made statements insinuating that it is safeguarding the rules-based international trading system. By pushing China to operationalize those statements, the US and the world may pressure it to make good on the commitments it made when it joined the WTO in 2001 and more. Success here would be a triumph of international economic policy and diplomacy and deliver significant gains for the US.
Tariffs have focused the US public on the importance of trade to the US economy. The president has an opportunity, in concert with Congress, to rebuild the trading system to produce real, long-term gains for the US economy. Hopefully he seizes the moment.
Neena Shenai is a nonresident fellow at the American Enterprise Institute, where her research focuses on global trade, international economics, and globalization. She is also a global trade attorney in Washington, DC.
Joshua P. Meltzer is a senior fellow in the Global Economy and Development program at the Brookings Institution. His research focuses on international economic relations and the intersection of technology and trade policy.
To read the article as it was posted by The American Enterprise, click here.