The response to these trends is radically changing the global business and political environment. Sustainability and national security have become top priorities. Production networks are changing rapidly. Inflation has become a serious problem for the first time in thirty years. And all of this was happening even before Trump returned to the White House.
While Trump’s flurry of executive orders looks chaotic, his administration may be busy implementing a grand strategy designed to weaken and dilute potential adversaries. Trump and other members of his administration have repeatedly said that the bilateral trade deficit is a signal that things are not in order and that America is being brazenly exploited to the detriment of its economy and national security.
The major U.S. trading partners with the largest bilateral surpluses (as of 2023) are China ($279 billion), the European Union ($209 billion), Mexico ($152 billion), Vietnam ($104 billion), Japan ($71 billion), and Canada ($64 billion, a result entirely attributable to U.S. energy imports). The four targeted by Trump’s first duties (Canada, Mexico, the EU and China) account for 66% of the entire U.S. trade deficit in 2023 ($1.06 trillion). If Japan and Vietnam are added, that figure rises to 83%.
The duties announced onEmancipation Dayare largely in line with the stated goal of targeting trade partners with large deficits. The new duty rates for China, the EU, Vietnam and Japan are 34%, 20%, 46% and 24% respectively, with Canada and Mexico still on a separate track – with high duties on cars, steel and aluminum.
But the April 2 duties are not at all limited to trading partners with whom the U.S. has a large deficit. No, the administration applied the 10% rate to all countries, even those with whom the U.S. has a surplus in trade. In addition, the Trump administration imposed duties above 10% on many small economies that have minimal impact on the U.S. trade balance, but spared large Latin American countries (except Mexico).
The reaction of the financial markets was immediate. The S&P 500 index lost $5 trillion, or roughly 10%, in the two trading days following Election Day. Business and consumer confidence continued to decline, and markets outside the U.S. also fell, due to the dominance of the U.S. financial system. China has already responded with its own 34% duties on U.S. imports, and other countries are considering retaliatory measures. As market and economic uncertainty increases, expectations of recession have risen.
However, the impact is likely to be greatest on the U.S. and those trading partners most dependent on U.S. demand. The US economy accounts for about 26% of nominal world GDP (or 15-16% in purchasing power parity terms), so its isolation would be a severe shock to the entire system. All countries except the U.S. would have to pay duties on exports to the U.S., but the impact of these duties would vary: medium for China, quite high for Vietnam, and very high for Mexico and Canada. On the positive side, other countries still have the rest of the world to sell to, and that rest of the world is not small.
In contrast, in the U.S., consumers and companies are facing incoming duties on everything from every other country in the world. Companies will probably also face high “retaliatory” duties if they try to enter foreign markets, and major countries may restrict foreign direct investment in America, which would partly defeat one of the stated purposes of the duties.
In other words, the damage will be widespread and vary from country to country and region to region, but the hardest hit is likely to be the U.S. economy because of its increased isolation from the rest of the world economy.
It’s not clear whether the administration believes the duties will help rebalance trade or whether they are designed to force trading partners and companies to relocate production and create jobs in the United States. Trump has endorsed foreign direct investment as a way to support his deficit-fighting and job-creating agenda, so the duties are presumably meant to encourage it.
Whatever one’s assessment of the diagnosis and treatment chosen by the administration, its goal is clear: to change the pattern of world trade and foreign direct investment in favor of domestic U.S. investment and employment. But such a program runs into problems: the global attractiveness of U.S. debt and equities, and the dollar’s status as an international reserve currency. Unless the U.S. intentionally reduces the attractiveness of dollar assets (which would require a partial closure of the capital account), the dollar’s status as a reserve currency is unlikely to change.
The fact is that the current system has no credible alternative. A growing world economy needs a growing monetary base to function properly. Instead of reducing the $1 trillion trade deficit, America is likely to redistribute it among different countries, which probably won’t lead to the kind of internal restructuring that Trump envisions.
Michael Spence
Nobel Prize-winning economist, professor emeritus of economics
and former dean of the Graduate School of Business at Stanford University.
© Project Syndicate, 2025.
www.project-syndicate.org
