Introduction
Despite the United States accounting for only 15% of global trade, Donald Trump has initiated a trade war against the entire world. If countries representing the remaining 85% unite and impose their own tariffs on US exports, Trump’s influence would vanish instantly.
The Vulnerability of the US Economy
One crucial lesson from Trump’s tariff chaos is the unexpected fragility of the US economy. The real economy and financial markets are strongly interconnected, making fears about future trade and production issues spread rapidly to stock markets, bond markets, and currency markets. The primary weakness of the US financial system is that large stock market declines can force highly leveraged, lightly regulated hedge funds to seek liquidity quickly, leading to massive asset sales, especially of public debt. This potential panic makes the US economy more vulnerable than others.
Trump’s Weakness: Giving In to Allies
Another lesson is that Trump’s grandstanding masks a fundamental weakness. When his tariffs threatened the trade interests of his billionaire friends, he conceded. The question now is how other nations can exploit these two weaknesses.
Avoiding Degradation and Ineffectiveness
Traveling to Washington to beg for concessions, as representatives from around 75 countries have reportedly done, is degrading and ineffective. It increases Trump’s sense of power and allows him to pit countries against each other. Moreover, when Trump senses weakness, he adds more burdensome conditions to any agreement, and such agreements are often worthless.
Exerting Pressure on the US Economy
A better strategy is to exert maximum pressure on the US economy, revealing its fundamental weaknesses, frightening Trump’s billionaire friends, and ultimately forcing him to concede again. This can be achieved by rejecting any negotiation and adopting proportionate retaliatory measures. If enough countries adopt this strategy, the US will find itself isolated, as it only represents 15% of global trade. The remaining 85% can coordinate their response and gain the upper hand.
The Political-Economic Argument for Retaliation
Some economists question the wisdom of retaliation, citing the classic free trade argument that since tariffs harm the applying country, others should not follow the aggressor into self-destruction. However, this argument overlooks the political economy of retaliatory tariffs. By imposing reciprocal tariffs on US products, countries can harm the US export sector, creating a domestic pressure group to end the aggression. Without such counterbalance, the import-substitution lobby in the US will hold sway.
Historical Success of Reciprocal Negotiations
A version of this political-economic argument has played a prominent role in postwar trade negotiations. By negotiating tariff reductions, countries used a reciprocity argument: we will reduce our own tariffs if others at the negotiating table do the same. This created a national pressure group of exporters in favor of tariff reductions and helped overcome opposition from the import-substitution sector. This approach has been successful in reducing tariffs worldwide, and there’s no reason it shouldn’t work today.
Coordinated Retaliatory Measures
A policy of coordinated retaliatory measures would maximize pressure on strategic export-dependent sectors like high technology and digital service industries, increasing the likelihood of success for internal opposition to Trump’s tariff policy. It would also maximize damage to the US production and trade system, shaking financial markets—the critical factor that made Trump concede initially.
Overcoming the Collective Action Problem
Formulating a principles-based argument for retaliation is different from organizing such a response. There’s a classic collective action problem here, as few countries are willing to risk inviting harsh and punitive retaliation. However, once enough countries join the effort, the Trump administration’s ability to impose such penalties will evaporate. The cost for the US to punish the world would be prohibitive.
The Author
Paul De Grauwe is a professor of European Political Economy at the Institute for European Studies, London School of Economics.
Copyright
Project Syndicate, 1995 – 2025
www.project-syndicate.org
Key Questions and Answers
- Q: What makes the US economy vulnerable? A: The US economy’s vulnerability stems from its interconnected real economy and financial markets, which can quickly spread fears about trade and production issues.
- Q: How can other nations effectively respond to Trump’s trade war? A: By coordinating and imposing their own tariffs on US exports, other nations can exert pressure on the US economy and force Trump to concede.
- Q: Why is retaliation a viable strategy despite free trade arguments? A: Retaliatory tariffs can harm the US export sector, creating a domestic pressure group to end aggression. Without such counterbalance, the import-substitution lobby in the US will hold sway.
- Q: How can historical negotiations inform current responses to Trump’s tariffs? A: Postwar trade negotiations successfully used reciprocity arguments to reduce tariffs worldwide. This approach can be equally effective today.
- Q: What challenges exist in implementing coordinated retaliatory measures? A: The collective action problem must be overcome, but once enough countries join the effort, the Trump administration’s ability to impose penalties will diminish.
