A man wears a big ranch hat and a stars and stripes shirt with a sparkling light in the background (Daniel Cardenas/Anadolu via Getty Images)

Washington will be a tough environment in which to advocate rules-based trade (Daniel Cardenas/Anadolu via Getty Images)

The unilateral trading system: US trade policy for Trump, again

Trump wants systemic changes and his recent tariff threats show that no issue is off limits.

Stephen Moran

5 December 20244 min read

Trade unilateralism will be a feature of Donald Trump’s second presidency. It’s already begun. Trump has recently threatened to apply a 25% tariff on Canada and Mexico because of illegal immigration and the illicit drugs trade, and a 100% tariff on BRICS+ countries over the dim prospect of them creating a currency to rival the US dollar.

Trump has an exaggerated view of tariffs as a cure-all for all manner of policy challenges. He claims they will improve the budget, rebuild the US industrial base, rebalance trade with Europe, Japan and others, and penalise American companies that have invested overseas to export to the US market.

Trump’s recent tariff threats show that no issue is off limits. While it’s unlikely that he would implement 25% tariffs on Canada and Mexico – the costs would be excessive, even for the United States itself – the two targeted countries can’t simply dismiss this as a negotiating ploy. They will likely accede to Trump’s demands where feasible, and thereby validate his approach.

Over the longer term, China will be a major focus of attention. In the campaign Trump promised to apply a 60% tariff on all Chinese goods. And he’s since announced that China faces an additional 10% tariff owing to its role as a production base for fentanyl.

But the scope to apply punitive tariffs on China is narrowing. Most Chinese exports to the US are already subject to tariffs. Those that have been spared the worst are mainly either inputs for US industry or consumer goods for which there are few cost-effective alternatives (home electronics, computers and toys for example).

The coping strategy of Chinese business has increased the threat of US tariffs on other countries, particularly Vietnam. In the past four years some Chinese exporters have trans-shipped goods through third countries, including Mexico, in order to circumvent US tariffs. Chinese firms also shifted manufacturing capacity to Vietnam primarily for export to the United States. In 2023 Vietnam was the fourth-highest source of US imports (after Mexico, China and Canada). With land and labour costs rising in Vietnam, Chinese companies are now looking to shift manufacturing to Thailand, Indonesia, Malaysia and Cambodia.

Bigger economies – China, the European Union, India – will likely retaliate with their own tariffs, compounding trade diversion.

Beyond the coercive use of tariffs, Trump wants systemic changes to US trade policy. The first is his threat of an across-the-board tariff of 10–20% on all imports. The second is his call for Congress to pass legislation enabling reciprocal tariffs to be applied on a product-by-product, country-by-country basis. With non-discrimination a basic principle underpinning multilateral trade rules, either of those changes could spark an existential crisis for the World Trade Organisation (WTO).

Even if those systemic policy changes aren’t pursued, the WTO will come under greater scrutiny in Washington. Trump’s pick for the role of United States Trade Representative, Jamieson Greer, wants Congress to revoke the US legal provision enabling China’s right to most favoured nation tariffs under WTO rules. So the outcome of the next five-yearly Congressional review of US membership of the WTO, due in 2025, carries a greater-than-usual degree of uncertainty.

In the next four years the trade diversion effects of tariffs from existing policy tools are likely to be a mix of the negative and positive for Australia: competitive stress for import-competing industries and downward price pressure for imported consumer goods. China, which takes over two-thirds of Australia’s merchandise exports, could experience lower demand. And possible US penalties on Vietnam and other countries hosting Chinese-owned exporters would also flow on to Australian exports.

Many targeted countries are likely to seek an exemption from US tariffs while offering concessions such as buying more US goods. Some of those deals could discriminate against Australian suppliers. Bigger economies (China, the European Union, India) will likely retaliate with their own tariffs – compounding trade diversion. And most countries will reinforce their other trade relationships: around 90% of world merchandise trade does not cross the US border.

Should the United States apply tariffs on small and medium-sized countries Beijing will take the opportunity to embellish its credentials as a reliable trade and investment partner. The Belt and Road Initiative would get a boost, as would the BRICS, with an expanded membership that now includes Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates. And China could symbolically lower some of its tariffs to the rest of the world, as it did in Trump’s first term.

We shouldn’t expect those Trump has selected for economic roles will contest his tariff threats. Both Scott Bessent (Treasury) and Howard Lutnick (Commerce) believe the United States has the size and market power to dictate import terms to other countries. In the words of Bessent, “they need us more than we need them.”

So Washington in the near term will be a tough environment in which to advocate rules-based trade. Nevertheless, Australia should make the attempt. The main risk to our interests is the prospect of serious damage to the multilateral trading system which underpins our long-term success as a trading nation. We probably can’t sell that message in Washington. But we should work with like-minded countries to highlight the economic and reputational costs of extreme trade policies to the United States itself.

About the author

Stephen Moran

Stephen Moran is an independent trade analyst.

Topics

World Trade Organisation United States Trade & investment