周鉅原 | Peter Chow
Published in the online magazine of Taiwan Research Hub, University of Notthingham
President Trump said that tariff was the most beautiful word in the dictionary. On April 2, 2025, he declared it was a Liberation Day by announcing a reciprocal tariff from 10% to 50 % on imports from almost all trading countries, with China singled out at 84%. Within a week, the stocks of the ‘Magnificent Seven’ firms, i.e., Alphabet, Amazon, Apple, Nvidia, Meta, Microsoft and Tesla, dropped 6.5% of their market values with a historic loss of $ 2.5 trillion before they rebounded. As the U.S. is the largest economy in the world with $ 3.3 trillion of import from the rest of the world in 2024, the proposed reciprocal tariff, if carried out, will significantly undercut the global economy which was projected to decline from 3.3% to 2.5% in 2025 by the International Monetary Fund (IMF). Meanwhile, the GDP in the U.S. was also projected to drop from 2.7% to 1.8% in 2025 by the IMF.
Tariff is being weaponised by President Trump both as the means and the ends for his aspiration to Make America Great Again (MAGA) by bringing manufacturing back to America. Though many Americans welcome the objective of MAGA, the policy of tariffs on almost all trading partners is highly controversial. During the presidential campaign last year, many economists, including 16 Nobel Laureates in economics, warned that tariffs would worsen the inflation crisis. Subsequently, other notable economists cautioned that reciprocal tariffs would lead to an economic recession.
Trade deficit in any country, notably the U.S., is mainly due to macroeconomic imbalance; if national saving in a country is less than its investment, then it will suffer from a trade deficit and will invite capital inflows from trade surplus countries. As the U.S. dollar has been and still is one of the key currencies of foreign exchange reserves in the world economy, many of those trade surplus countries purchase U.S. Treasury bonds as their foreign exchange reserves. The same rationale also applies to foreign investors in their portfolio management. One reason that the U.S. can afford to run its persistent trade deficits since the 1980s is because of the role of the U.S. dollar in the international financial market. Other countries don’t have the option to suffer from persistent trade deficits for more than 4 decades without suffering from a balance payment crisis.
Of course, some economists may concur with the strategic trade policy of applying tariffs for national security. They can tolerate the tariff and trade sanctions against China for the sake of national security. But they disagree with President Trump’s approach because of the high interdependency between the U.S. and China due to decades of globalisation. They argue that bringing manufacturing back to the States cannot be accomplished in a short period. The U.S. government would need to provide both the carrot and the stick, not just a tariff, to achieve that goal, especially in infrastructural support and the supply of qualified labour. Neither can be accomplished in the short run by tariffs alone. Hence, de-risking, not de-coupling, is a pragmatic strategy toward China. Therefore, a 145% tariff on imports from China is not sustainable. Understandably, balancing economic interests and national security is a delicate task and a big challenge for the Trump administration.
Douglas Irwin, an American trade historian, synthesised Trump’s tariff policy objectives in three R’s: revenue, restriction, and reciprocity. One may add “retribution” as the fourth R. Trump adopted the historic role of tariffs in government revenue during the period of William McKinley (1843-1901) to support his point and even argued that tariffs could substitute for income tax as government revenue.
However, the economic structure of the U.S. in the 21st century is completely different from that during the McKinley period, when the U.S. industry was beginning to emerge on the world stage during the 19th century. The historic argument of protecting the ‘infant industry’ is no longer valid when the U.S. economy is at a post-industrialisation stage in the 21st century. In fact, tariff only accounts for about 2% of federal government revenue in the past 70 years in the U.S. Raising tariffs to replace income tax is inconceivable.
Can the tariff restrict imports from abroad to reduce the trade deficit? For country-specific tariffs, it could generate a trade diversion effect by switching imports to other non-tariffed countries. The tariffs on China since the first term of the Trump administration have not reduced the U.S. overall trade deficit. However, the percentage of its trade deficit with China in total trade deficit declined. It means that U.S. importers switched their orders from China to other countries which produce similar products to that China made. As a matter of fact, data on U.S. imports from countries like Vietnam, Malaysia and Mexico increased substantially after 2018. It provides the empirical support for the trade diversion thesis.
For sector-specific tariffs, the tariff revenues depend on whether domestic import-substitution industries could replace the imports or not. After the drive for globalisation, more and more of U.S. imports are in intermediate goods, parts and components for further processing before reaching the final consumers. A tariff on those intermediate products would increase the cost of production and result in inflation. In fact, the speculation of the tariff effect has contributed to consumers’ expected inflation and jeopardised consumer confidence in March-April, as reported by the survey of consumer confidence conducted by the University of Michigan.
Applying a unilateral reciprocal tariff on all trading partners will not only affect U.S. relations with its allies but also challenge the rules-based trade system under the WTO, which was nurtured mainly by the U.S. leadership since the end of WWII. No matter how slow the progress on the multilateral trade liberalisation negotiations has been since the collapse of the Doha round, free trade has been and still is the DNA of the WTO. The U.S. complaint on unfair trade practices undertaken by some of its trading partners, especially China, needs to be managed not by unilateral tariffs but by further negotiation for trade liberalisation.
Among the 166 members of the WTO, more than 120 of them depend more on China than on the U.S. for their exports. Moreover, many of them import more from China than from the U.S. Relative trade dependency on China rather than the U.S. has strong ramifications in geopolitics amid the race for global leadership between the U.S. and China. This is especially relevant to those Indo-Pacific countries which have a heavy trade dependency on China’s market. Yet, they count on the U.S. support to deter China’s intimidation and Beijing’s challenge to their national security.
Facing the military threat and political infiltration from Beijing, Taiwan is especially vulnerable to its relative trade dependency with the two largest economies. Taiwan used to ship 40% of its total exports to China and Hong Kong after joining the WTO in 2001. But its trade dependency on China decelerated after 2018 as the trade war between Beijing and Washington exploded. At the historical juncture, the U.S. should reinforce its trade and investment flows with Taiwan rather than imposing tariffs on its imports from Taiwan by tariffs.
An appropriate way to enhance U.S. leadership is to further expand its trade with Indo-Pacific countries through trade liberalisation rather than limiting U.S. imports from them. The U.S. will become stronger, not weaker, if more and more countries rely on the U.S. market for their trade because that will be more conducive to aligning with the U.S. if their trade dependency on the U.S. increases. However, the reciprocal tariff, if implemented, will move in the opposite way, which will make America alone.
The 90 days of pause on reciprocal tariffs could be a historic turning point, depending on the final outcome of the trade negotiations. It could steer the future course of the world trade order in either direction from the status quo. Nobody really knows what the outcome of the final trade deals will be. But, as far as the technology rivalry between the U.S. and China continues, one could reasonably predict that the global trade under the second term of the Trump administration will be much slower than it was before. The decades-long globalisation will be restructured or bifurcated, whether de-globalisation or re-globalisation, world trade will have a new page in the near future. This scenario carries important consequences for geopolitics as well.
Peter C.Y. Chow affiliates with the City College and Graduate Centre of the City University of New York.
This article was published as part of a special issue on ‘Trump’s Tariffs: What does it mean for Taiwan?‘.