KEY TAKEAWAYS

• The White House has given the Office of the U.S. Trade Representative, along with the departments of Treasury and Commerce, until April 1 to identify countries the administration should confront with corrective trade actions.
• It would be a mistake for the Trump administration to impose across-the-board tariffs on all nations, even if some run trade surpluses with America.
• The administration should focus on the nations that employ the most extensive arrays of unfair trade practices, including behind-the-border restrictions that specifically target U.S. companies or exports.
• Based on an index composed of 11 indicators covering America’s trade balances and key barriers U.S. industries face in markets around world, the administration should focus the greatest attention on China, India, and the European Union.
• While it is highly unlikely that tariffs or other pressure can convince China to reduce its trade distortions, such measures might work vis-à-vis U.S. relations with other nations.

Introduction

The second Trump administration has taken office looking to put U.S. trade relations on a more equitable footing with the rest of the world. President Trump has railed that other nations “are taking advantage of us” and vowed to ensure that U.S. companies are treated fairly in international markets. As Secretary of State Marco Rubio recently told U.S. allies, “I know you’ve gotten used to a foreign policy in which you act in the national interest of your country, and we sort of act in the interest of the globe or global order. But we are led by a different person now.”

To enact the president’s vision, the White House has instructed the Office of the United States Trade Representative (USTR), in coordination with the departments of Commerce and Treasury, to identify “any unfair trade practices by other countries and recommend appropriate actions to remedy such practices” by April 1, 2025.

Meanwhile, the president has already trained his fire at several nations in the opening weeks of his administration—notably Canada, China, Colombia, and Mexico—but the to-do list is long, as an increasing number of countries around the world have adopted mercantilist trade practices in recent decades. Against that backdrop, the administration should focus on countries where systematically unfair, mercantilist trade policies are inflicting the most significant damage on the U.S. economy and U.S. corporations (large and small alike), and where the United States stands to gain the most by restoring balanced trade. Accordingly, the Information Technology and Innovation Foundation (ITIF) has developed the “Trade Imbalance Index” described in this report. It evaluates 48 countries (15 of which are included in the “European Union” bloc) on 11 measures to ascertain which are the biggest trade mercantilists or scofflaws and where the Trump administration should concentrate its attention as it seeks to advance a trade policy that more effectively defends U.S. interests and ensures more balanced trade relations.

This report evaluates the largest 48 countries by gross domestic product (GDP) on 11 indicators covering 4 categories. In brief, the categories and indicators are as follows:

 Trade balance in goods and information services: This category considers U.S. trade balances in goods and information services. ITIF used the raw values of the trade balances rather than the relative values (e.g., trade balance as a share of GDP) to better measure the overall harm a nation has on the United States when it runs a surplus. In other words, a nation with which the United States has a high deficit would cause more harm to the United States even if the deficit were small when compared to its GDP.

 Trade restrictions: These involve a simple mean tariff rate across all product categories, the prevalence of non-tariff trade barriers (NTBs), and the nation’s Services Trade Restrictiveness Index score.

 Taxes and regulations: These cover the extent of a country’s Digital Markets Act (DMA) regulations, extent of digital services taxes (DSTs), extent of pharmaceutical price controls, the presence of antitrust fines, and the presence of noncompetition fines on the digital economy. 

 Intellectual property (IP): This category includes the 2024 USTR Section 301 Watch List and the nation’s score on the U.S. Chamber of Commerce International IP Index.

Because we believe that America’s bilateral trade balance with a given country is not the most important factor in determining whether the Trump administration should prioritize that nation for a trade response, the trade-balance indicator accounts for only one-quarter of the total weighted score in our index. Ultimately more important than bilateral trade balances are the underlying factors affecting U.S. trade with a given country. So even if a country runs a trade deficit with the United States, there may be reason for the Trump administration to confront it if the country employs a significant number or degree of unfair trading practices.

Weighing these considerations, China, India, the European Union, Vietnam, and Argentina rank as the five worst offenders in ITIF’s index. (In this study, “European Union” refers to the 15 largest EU members, except in the trade-balance indicator where it refers to the whole bloc.)

The more negative the score, the more the Trump administration should prioritize that nation for a trade response. The 10 worst-performing nations with negative scores (from worst to best) are China, India, the European Union, Vietnam, Argentina, Thailand, Brazil, Turkey, Mexico, and Indonesia. In contrast, the nations that should be least likely to face retaliatory measures from the Trump administration include Singapore, Switzerland, Peru, the United Arab Emirates, and the Philippines.

This report begins by offering an in-depth analysis of the problematic trade and economic policies of the top three most problematic nations (or regions in the European Union case). It then analyzes how countries fared on each of the individual indicators in the report. Finally, it offers trade policy recommendations for the Trump administration and Congress to responsibly address the mercantilist practices of foreign countries.

Mercantilist Country Analysis

As noted, China, India, and the European Union score lowest in ITIF’s index and stand out as the nations where the Trump administration should focus the greatest attention on rebalancing trade and economic relations.

China

China’s ranking first in the study is no surprise. The country has persistently failed to adhere to the commitments it made to the United States, and other international trade partners, when it joined the World Trade Organization (WTO), as ITIF has documented across numerous reports. Over the past decade, the country has recorded a nearly $3.5 trillion trade surplus in manufactured goods with the United States. In 2023, China’s goods trade surplus with the United States reached $279 billion, with this amount growing to $295 billion in 2024. And that figure represented about one-third of China’s nearly $1 trillion trade surplus with the world last year as its exports swamped the globe. China’s 2022 simple mean tariff rate stood at 6.5 percent.

USTR identified China as a Priority Watch List country in 2024 for its continued infringements on U.S. IP rights. The report notes that “long-standing issues [remain] including technology transfer, trade secrets, counterfeiting, online piracy, copyright law, and patent and related policies.” The Commission on the Theft of American Intellectual Property has estimated that China’s IP theft may cost the U.S. economy as much as $600 billion annually. A 2019 CNBC Global CFO Council report found that one in five North American corporations had their IP stolen in China in 2018. In ITIF’s series of “How Innovative Is China in High-Tech Industries” reports, ITIF documented numerous cases of IP theft in sectors ranging from electric vehicles and nuclear technology to semiconductors and electronic displays. China also continues to be the world’s leading source of counterfeit and pirated goods. The country further imposes more barriers to cross-border data flows than any other nation in the world.

China’s rampant IP theft may cost the U.S. economy as much as $600 billion annually, with high-tech sectors most at risk.

China has opened specious antitrust investigations into U.S. tech companies including Google and NVIDIA and in the past imposed unjustified antitrust fines on U.S. tech companies, such as the $1 billion fine it imposed on Qualcomm in 2015. With regard to pharmaceuticals, China imposes steep drug price controls and favors Chinese firms in national drug selection.

Forced transfer of technology or IP as a condition of Chinese market access—or requirements to manufacture locally as a condition of access to Chinese markets—remains a perennial challenge. Indeed, China calls this strategy “trading technology for market.” However, now that China has sufficiently competitive high-tech firms in a variety of sectors, it is increasingly moving from a strategy of “compulsion” to one of “expulsion.”

For instance, on April 12, 2024, The Wall Street Journal reported that “China’s push to replace foreign technology is now focused on cutting American [chipmakers] out of the country’s telecommunications systems.” The move would impact a variety of U.S. semiconductor companies, including AMD and Intel. The article notes that “[Chinese] officials earlier this year directed the nation’s largest telecom carriers to phase out foreign processors that are core to their networks by 2027.” The effort is similar to one articulated in Document 79, which requires state-owned enterprises in finance, energy, and other sectors to replace foreign software in their information technology (IT) systems by 2027.

Elsewhere, the Chinese government has asked electric vehicle makers from BYD to Geely to sharply increase their purchases from local auto chipmakers, part of a campaign to reduce reliance on Western imports and boost China’s domestic semiconductor industry. China’s Ministry of Industry and Information Technology has directly instructed Chinese automakers to avoid foreign semiconductors if at all possible. Such measures leave no doubt that import substitution and achieving self-sufficiency represent an essential goal of China’s competitive strategy in a range of high-tech industries from autos to semiconductors. Such a strategy is directly antithetical to and contravenes the commitments China made to global trade partners in joining the WTO. China is indeed the world’s number one mercantilist.

India

India ranks second in this index. In 2024, India recorded a $45.7 billion trade surplus with the United States. That was atop a $43.3 billion trade surplus the year before. India’s simple mean tariff rate is 14.3 percent, while on a trade-weighted basis, India’s rate is about 12 percent compared with America’s rate of 2.2 percent. Of the countries assessed in this report, India scores fourth worst with regard to its services trade restrictiveness. India continues to maintain high customs duties on IP-intensive goods such as IT products, solar energy equipment, medical devices, pharmaceuticals, and capital goods.

In 2016, India implemented an equalization levy (EL) of 6 percent on nonresidents engaged in online advertisement and related activities with Indian customers. India’s Finance Act of 2020 expanded the EL to introduce a levy on e-commerce supply or services equal to 2 percent of gross income facilitated by a nonresident e-commerce operator. On March 12, 2024, the Indian Ministry of Corporate Affairs released a draft report of the Committee on Digital Competition Law along with a draft bill on the Digital Competition Act that “bears a striking resemblance” to the EU’s problematic Digital Markets Act. The legislation embraces an ex ante regulatory model and follows the path of overbearing competition policy taken by the EU.

U.S. companies have also been the target of significant antitrust fines levied by Indian authorities. India’s Competition Commission fined Meta $24.5 million for its data sharing practices, contending that the company abused its dominance and “coerced” WhatsApp users into accepting a 2021 privacy policy that allegedly expanded user data collection and sharing, giving it an unfair advantage over rivals. The commission also fined Google $154 million for practices related to its Android operating system. Overall, India is heavily scrutinizing American tech companies and following a European approach.

India remains on USTR’s Special 301 Priority Watch List, as “there continues to be a lack of progress on many long-standing IP concerns raised in prior Special 301 Reports. India remains one of the world’s most challenging major economies with respect to protection and enforcement of IP.” India continues to place elevated restrictions on patent subject matter eligibility that exceeds the required novelty, inventive step, and industrial applicability requirements. Under Section 3(d) of the Indian Patent Act, there exists an additional “fourth hurdle” regarding the inventive step and enhanced efficacy that limits patentability for certain types of pharmaceutical inventions and chemical compounds. India ranks 42nd out of 55 countries on the Global Innovation Policy Center’s International IP Index. Elsewhere, India’s pirating of film and audiovisual content through illicit video recording remains a major challenge.

On February 13, 2025, Indian Prime Minister Narendra Modi visited president Trump in Washington, D.C. He appeared to come prepared to offer certain tariff concessions on some products, including automobiles and electronics, to the United States. Coming out of those meetings, Indian and U.S. officials agreed to start developing “broad contours of [a] proposed trade agreement” between the two countries, which obviously has significant potential to address some of these trade irritants and significantly improve the India-U.S. trade relationship.

The European Union

The EU ranks third in this index, as it’s among the leading practitioners of discriminatory trade policies targeting U.S. enterprises, particularly those in digital industries, thanks especially to its DMA and Digital Services Act (DSA). In fact, there are over 100 digital regulations in force across the EU, enforced by at least 270 agencies. European policymakers ostensibly designed the DMA to create a fairer digital market by preventing large online platforms, which the EU calls “gatekeepers,” from abusing their market power and ensuring more competition for smaller companies and consumers in digital industries. Its sister legislation, the 2022 DSA, addresses illegal content, transparent advertising, and disinformation.

But as ITIF has written, the legislation should really have been called the “U.S. Tech Firms Act,” as the legislation intentionally singles out U.S. tech companies. For instance, the European Parliament rapporteur for the DMA, Andreas Schwab, suggested that the DMA should unquestionably target only the five biggest U.S. digital firms (Google, Amazon, Apple, Facebook, and Microsoft). Basically, the DMA and DSA have been designed to cover, almost exclusively, U.S. firms and not their European or Chinese competitors that offer similar services. A leaked draft of the proposed EU DSA was quite clear on this intent: “Asymmetric rules will ensure that smaller emerging competitors are boosted, helping competitiveness, innovation, and investment in digital services.” Indeed, the European Commission has opened non-compliance investigations against Alphabet, Apple and Meta under its DMA.

The DMA should really have been called the “U.S. Tech Firms Act,” as the legislation has almost exclusively singled out U.S. tech companies.

Certain European countries have used their legislation to impose punitive antitrust fines on U.S. companies. For instance, Apple faced a £1.5 billion ($1.9 billion) class action lawsuit in the United Kingdom for allegedly overcharging software developers through the App Store. The case claims that Apple abused its market dominance by imposing a 30 percent commission on app purchases. Further, the United Kingdom’s Competition and Markets Authority (CMA) has indicated possible investigations into Amazon’s and Microsoft’s dominance in cloud computing, following alleged concerns about anticompetitive behavior in the sector.

In 2023, the EU ran a trade surplus of $208.7 billion with the United States. The EU runs significant trade surpluses with the United States across a number of advanced-technology industries, including pharmaceuticals and medical devices, motor vehicles and parts, electrical goods, telecommunication goods, chemicals, and instruments. Europe’s large trade surplus with the United States in pharmaceuticals stems largely from the extensive drug price controls implemented by most countries on the continent and their failure to pay adequate prices for innovative medicines. Of the 27 EU nations, all but 7 (Malta, Luxemburg, Croatia, Lithuania, Belgium, Spain, and the Netherlands) run trade surpluses in goods with the United States. And the country whose officials complain the loudest of U.S. “digital dominance”—Germany—runs the largest trade surplus.

While the European Union applies a relatively low simple mean tariff rate, this obscures a variety of value-added taxes and other fees that make U.S. products more expensive in Europe. For example, the EU levies a 10 percent tariff on U.S. car imports, while the United States imposes a 2.5 percent duty. And as president Trump has observed, when Europe’s value-added taxes (VAT) are added in, U.S. car exports to Europe can be tariffed and taxed as high as 30 percent.

Indicator Analysis

Trade Balance in Goods and Information Services

The Trade Balance in Goods and Information Services indicator provides a standardized score for each nation based on its trade surplus or deficit in goods and information services with the United States in 2023, as measured by the U.S. Census Bureau’s “USA Trade” and the Organization of Economic Cooperation and Development (OECD). Countries with large trade surpluses against the United States receive a low standardized score, those with moderate surpluses receive a mid-range score, and those with trade deficits or balanced trade receive a high score.

This indicator is included in the index because significant trade imbalances are often perceived as evidence of unfair trade practices, currency manipulation, or insufficient market access for U.S. goods. ITIF uses the trade balance in goods and information services measure here (as opposed to trade balance in goods as a share of GDP measure), recognizing that the Trump administration places a significant focus on the overall harm a large trade deficit has on the United States. In other words, the administration is more concerned with a nation with a large deficit than one with a large deficit relative to its GDP. As such, under the Trump administration, countries with low scores should be more likely to face retaliatory measures such as tariffs, stricter trade policies, or efforts to renegotiate trade agreements.

China, the European Union, Mexico, and Vietnam all could become prime targets for trade restrictions or renegotiations based on their substantial surpluses. For example, China has the highest surplus at $277.5 billion. The European Union runs a surplus of $208 billion, while Mexico runs a surplus of $151 billion and Vietnam enjoys a $104 billion surplus. Meanwhile, Australia, the United Arab Emirates, and the United Kingdom maintain a more balanced trade relationship with the United States, all running a deficit that exceeds $10 billion, making them less likely to face economic pushback from the administration on account of trade balances.

Trade Restrictions

Simple Mean Tariff Rate for All Products

The Simple Mean Tariff Rate for All Products indicator provides a standardized score for each nation based on its unweighted average of simple mean tariff rates across all traded products for 2022, as measured by the World Bank’s World Development Indicators. Countries with high simple mean tariff rates receive a low standardized score, those with moderate tariffs receive a mid-range score, and those with low or near-zero tariffs receive a high score.

This indicator is included in the index because high tariff rates create significant barriers for U.S. exports, raising costs for American businesses and reducing market access. Protectionist tariff policies can stifle competition, inflate consumer prices, and disrupt global supply chains, making it harder for U.S. firms to compete internationally. Lower-scoring countries should legitimately face more trade scrutiny from the Trump administration.

Non-Tariff Trade Barriers

The Non-Tariff Trade Barrier indicator provides a standardized score for each nation based on the prevalence of NTBs, as measured by the Fraser Institute’s Economic Freedom of the World 2024 index. Countries with extensive NTBs receive a low standardized score, those with moderate restrictions receive a mid-range score, and those with minimal barriers receive a high score.

This indicator is included in the index because NTBs limit market access for U.S. firms, increase compliance costs, and reduce U.S. firms’ competitiveness in the global market. As such, under the Trump administration, countries with low scores are more likely to face countermeasures, such as tariffs, trade restrictions, or heightened regulatory scrutiny.

For example, Argentina requires importers to request nonautomatic import licenses on about 1,500 products and has reduced the validity of licenses from 180 days to 90 days. Nigeria also employs NTBs that are detrimental to importers. For instance, it requires food, drugs, and cosmetics to be inspected but does not have the capacity to perform these inspections in a timely manner. Meanwhile, Singapore and Chile employ the fewest NTBs of nations in this study and are less likely to face sanctions for this particular reason.

Services Trade Restrictiveness Index

The Services Trade Restrictiveness Index indicator provides a standardized score for each nation based on the level of restrictions in its services trade sector, as measured by OECD’s Services Trade Restrictiveness Index in 2023. Countries with highly restrictive services trade policies receive a low standardized score, those with moderate restrictions receive a mid-range score, and those with mostly open services trade policies receive a high score.

This indicator is included in the index because restrictive services trade policies can hinder U.S. companies operating in sectors such as finance, telecommunications, and digital services. High restrictions increase costs, limit market access, and reduce competitiveness for American firms. Moreover, they also reduce supply and increase the cost of services for U.S. consumers.

For example, Indonesia is particularly restrictive partly due to its restrictions in legal services, accounting services, and telecommunications. Meanwhile, Thailand is quite restrictive in services trade because reforms that liberalize services trade have slowed in recent years. In contrast, Japan, the United Kingdom, Chile, and Australia have the most open services trade policies and are less likely to face pushback from the administration for this reason. Japan notably has a stable regulatory environment for services and has moderately liberalized its logistics and insurance sectors.

Taxes and Regulations

Digital Markets Act

The Digital Markets Act indicator provides a standardized score for each nation based on the presence or absence of a DMA or a similar regulatory framework in a nation. Countries that have implemented a DMA or comparable legislation receive a low standardized score, those now developing such regulations receive a mid-range score, and those without such laws receive a high score.

This indicator is included in the index because digital market regulations, such as the DMA, impose restrictions on large technology firms, many of which are U.S.-based. These regulations can limit firms’ revenues, restrict business practices, and increase compliance costs, potentially reducing profitability and innovation. The Trump administration should scrutinize countries that field anticompetitive DMA laws.

This is because these nations either have a DMA or similar law themselves or are subject to one as part of a regional entity (e.g., their EU membership.) For instance, Thailand has adopted the Platform Economy Act, legislation that represents a combination of the DMA and the DSA. Similarly, the United Kingdom has the Digital Markets, Competition, and Consumer Act of 2024, a DMA-like legislation that imposes restrictions on digital firms. Twenty nations with a standardized score of 0.7 are the least likely to face retaliation based on this measure, as they have not adopted a DMA-like law. These nations include, among others, Singapore, South Africa, Taiwan, the United Arab Emirates, and Vietnam. 

Digital Services Tax

The Digital Services Tax indicator provides a standardized score to each nation based on whether it imposes a DST on firms’ revenues using data from the Digital Services Taxes DST—Global Tracker and Digital Policy Alert’s Digital Services Taxes Tracker. Countries that have fully implemented a DST receive a low standardized score, while those without such a tax receive a high score. This indicator is included in the index because DSTs can increase operational costs, reduce profitability, and harm U.S. technology companies’ competitiveness.

The United Kingdom is likely to face repercussions due to its 2 percent tax on marketplaces, social media platforms, and search engines that exceed an annual global sale of £500 million ($635 million) and an in-country sales threshold of £25 million ($31.8 million). Canada imposes a 3 percent tax on digital service companies with more than CA$20 million of revenue from Canadian sources. Similarly, India imposes a 6 percent tax on advertising and a 2 percent tax on goods and digital services. Finally, 18 nations are unlikely to face penalties by the Trump administration for this reason, as they do not impose DSTs. These nations include Australia, Japan, Mexico, South Korea, and Switzerland.

Presence of Digital Economy Fines on U.S. Companies

The Presence of Digital Economy Fines on U.S. Companies indicator provides a standardized score that reflects whether U.S. firms have been subjected to digital economy-related fines by foreign governments, as tracked by the Digital Policy Alert’s Activity Tracker. Countries that have imposed a fine on U.S. companies receive the lowest scores, while those with no such penalties receive higher scores. ITIF includes this indicator because it highlights regulatory environments that may disproportionately target U.S. firms, harming their competitiveness in the global economy.

These nations include Australia, several European Union nations, India, South Korea, and the United Kingdom. For instance, Argentina’s Agency for Access to Public Information fined Google 180,000 Argentine pesos for refusing to give an individual access to her personal data. Meanwhile, the Reserve Bank of India fined Amazon Pay 30.6 million Indian rupees for failing to comply with “Master Directions on Prepaid Payment Instruments” and the “Master Direction – Know Your Customer Direction” provisions. In contrast, 23 nations, including Canada, Japan, Mexico, Switzerland, Taiwan, Thailand, and Vietnam are unlikely to face retaliatory measures. 

Extent of Pharmaceutical Price Controls

The Extent of Pharmaceutical Price Controls indicator provides a standardized score for each nation based on its ranking in ITIF’s report “Contributors and Detractors: Ranking Countries’ Impact on Global Innovation” and other outside sources. Nations with a low standardized score exhibit a high degree of pharmaceutical price controls, those with a mid-range score have a moderate level of controls, and those with a high score impose minimal price controls.

This indicator is included in the index because stringent pharmaceutical price controls reduce revenue for U.S. pharmaceutical companies, limiting their ability to invest in research and development (R&D). This, in turn, can hinder the development of next-generation drugs, potentially impacting public health in the United States. Indeed, as ITIF explained, “Pharmaceutical firms view current drug price regulations as likely to continue, reducing their potential profits while disincentivizing their investment in R&D.” As a result, countries with low scores may be more likely to face retaliatory measures under the Trump administration.

 Just like in Europe, Japan’s extensive drug price controls have decimated the country’s biopharmaceutical industry, as Japan’s share of global value added in the pharmaceutical industry declined by 70 percent, from 18.5 to 5.5 percent, from 1995 to 2018. Moreover, an ITIF report finds that, after adjusting for GDP per capita, prescription drug prices in the United Kingdom are 53 percent of those in the United States. In other words, for every $100 spent on prescription drugs in the United States, the United Kingdom spent only $53. Meanwhile, Taiwan, Switzerland, Singapore, and six other nations are least likely to face trade scrutiny for this reason, as their pharmaceutical price controls are relatively minimal. 

Antitrust Fines

The Antitrust Fines indicator provides a standardized score for each nation based on the presence of antitrust fines imposed on corporations. Countries with no antitrust fines receive a high standardized score while those that have imposed fines receive a low one.

This indicator is included in the index because aggressive antitrust enforcement can create regulatory uncertainty, increase compliance costs, and disproportionately impact large U.S.-based firms, impeding U.S. firms’ competitiveness. High antitrust fines can be viewed as a tool of protectionism, targeting successful foreign companies while shielding domestic competitors.

China stands out as one of the worst offenders on this indicator, marred by its unfounded fining of Qualcomm for $975 million in 2015 and its subsequent baseless announcements of antitrust investigations against Google and NVIDIA. Elsewhere, Australia has fined Google over what it deems misrepresentation of consumer data collection. The maximum fine per violation is now the greater of $50 million or 30 percent of a company’s Australian turnover during the infringement period. In January 2025, Apple faced a £1.5 billion ($1.9 billion) class action lawsuit in the United Kingdom for allegedly overcharging software developers through the App Store. Meanwhile, the Mexican competition authority has fined the Mexican unit of Walmart, Walmex, for alleged anticompetitive practices. It has also fined HP in the past for not obtaining appropriate consent for a merger with Plantronics.

Meanwhile, 20 nations score well at 0.8, signaling a more business-friendly approach. These nations include Canada, Brazil, and Japan in addition to the countries listed below. The EU, known for its stringent competition policies and major fines on U.S. tech giants, stands in the middle range with a score of -0.4. 

Intellectual Property

USTR Special 301 Watch List

The 2024 USTR Special 301 Watch List indicator provides a standardized score for each nation based on its inclusion in USTR’s Special 301 Report, which catalogs the nations that most extensively infringe on the interests of U.S. IP rightsholders. Countries on USTR’s Priority Watch List (i.e., the most intensive IP-infringing countries) receive the lowest score, those on the Watch List receive a mid-range score, and those not listed in the Special 301 report received the highest score. ITIF includes this indicator because the Special 301 Report assesses the adequacy and effectiveness of U.S. trading partners’ protection and enforcement of IP rights. Nations with lower scores generally exhibit weaker IP protections and are therefore more susceptible to facing retaliatory measures from the Trump administration, as inadequate IP policies or enforcement increases the risk of U.S. IP theft.

China represents a particularly likely target, as it is the world’s most significant perpetrator of IP theft. Moreover, the nation has not addressed U.S. concerns over forced technology transfers despite committing to the removal of those policies. Meanwhile, India would also be a prime target for Trump administration scrutiny because of its presence on the priority watch list. The nations with a score of 0.6, including Norway, Israel, Taiwan, and the United Kingdom, would be least likely to face retaliatory measures for this reason, as they were not listed on the 2024 Special 301 watch list. 

International IP Index

The International IP Index indicator provides a standardized score for each nation based on the strength of its IP rights framework, as measured by the U.S. Chamber of Commerce Global Innovation Policy Center’s International IP Index 2024, Twelfth Edition. Countries with strong IP protections received a high standardized score, those with moderate protections received a mid-range score, and those with weak or inadequate protections received a low score.

This indicator is included in the index because robust IP protections benefit U.S. companies—particularly in pharmaceuticals, technology, and entertainment—by safeguarding patents, copyrights, trademarks, trade secrets, and other forms of IP. Weak IP protections can increase counterfeiting, piracy, and unfair competition, harming U.S. businesses. Under the Trump administration, countries with low scores may be more likely to face countermeasures such as trade sanctions, tariffs, or pressure to strengthen their IP environments.

Indeed, according to the International IP Index, Pakistan ranks as the fifth-worst nation in terms of patent rights and second worst for copyright protections. Meanwhile, Egypt was the sixth-worst nation for copyright-related rights and trademark-related rights. In contrast, the United Kingdom, Japan, and the European Union have the strongest IP protections and are unlikely to face pushback from the administration for this reason. Indeed, the United Kingdom ranked in the top 10 nations with the best patent rights, copyright-related rights, and trademark-related rights.

Policy Recommendations

President Trump is certainly correct that, for too long, too many nations have been taking advantage of unbalanced trade relationships with the United States. In too many cases, the United States has extended lower tariffs, imposed fewer NTBs, or offered a more protective environment for IP rights than has a partner trade nation. The United States has also tolerated wildly unbalanced trade flows with nations such as China for far too long. Reciprocal and equitable trade relationships with partner nations are certainly a compelling vision, and the Trump administration is certainly justified in exploring policy measures to make that a reality.

That said, tariffs are not the unalloyed good the Trump administration appears to believe they are. The Trump administration should certainly not be implementing a universal tariff on all nations. Likewise, blanket, global sectoral- or technology-based tariffs—such as the tariffs “in the neighborhood of 25 percent” on imported vehicles, pharmaceuticals, and semiconductors that president Trump proposed on February 18, 2025—are unjustified and would inflict tremendous harm on the U.S. (and global) economy. Tariffs on intermediate products, such as the 25 percent tariffs president Trump has proposed on steel and aluminum products, are also certain to be counterproductive and deleterious to the U.S. economy.

In the opening days of his administration, Trump threatened 25 percent tariffs on Canada and Mexico (and 10 percent on China) to create negotiating leverage to draw stronger action from those nations to dramatically reduce the flow of illegal immigration and fentanyl into the United States. On March 4, 2025, president Trump proceeded with implementation of those 25 percent tariffs on Canada and Mexico (at the 10 percent level for Canadian energy imports) and 20 percent for China. The president has similarly threatened tariffs on EU nations to win concessions from them regarding several of the unfair trade practices documented in this report. It’s one thing for the Trump administration to threaten tariffs as a negotiating tool, but when partner nations respond by meeting the Trump administration’s demands—as, for instance, Canada and Mexico clearly have with their steps to enhance border enforcement and interdict drugs—then the Trump administration should take tariffs, or the threat thereof, off the table. This is certainly the case with Canada and Mexico, where the Trump administration’s proposed tariffs would also place the United States in clear contravention of its U.S.-Canada-Mexico (USMCA) free-trade agreement (FTA) commitments.

Reciprocal tariff relations among nations make the most sense when those tariffs are at zero.

China stands in a different category from virtually all the other countries assessed in this report. That’s true first because China pursues fundamentally mercantilist trade and economic practices—what ITIF has identified as “power trade”—in a manner distinct from most of the other largely market-based, if occasionally protectionist, countries in this report. Second, for this reason, China is unlikely to modify its fundamentally mercantilist approach in response to Trump administration pressure, whereas other countries may respond by dropping or modifying some of their unfair trade practices in response to such pressure. And while tariffs on China may well be justified due to its litany of unfair trade practices ranging from currency manipulation to massive industrial subsidization to rampant IP theft, tariffs alone will be insufficient to address the China challenge. Rather, as ITIF has written, America must pursue a holistic strategy to turbocharge its own innovation-based economic growth while marshalling an allied coalition that pressures China to stop rigging markets and start competing on fair terms. Effectively dealing with the China challenge will require a much more sophisticated set of tools than tariffs alone.

President Trump’s preoccupation with tariffs would be a fine thing if it were focused on eliminating them as broadly as possible, not on introducing new ones on trade partners across the world. Yet, his instinct for reciprocal trade relations is correct. For that reason, the Trump administration should make it a major initiative to expand the Information Technology Agreement (ITA), a plurilateral WTO agreement that commits member nations to eliminate tariffs on trade across hundreds of information and communications technology products. Similarly, the 1994 Agreement on Trade in Pharmaceutical Products—more commonly referred to as the “zero-for-zero initiative”—commits Canada, the European Union and its 28 member states, Japan, Norway, Switzerland, the United States, and Macao (China) to reciprocal tariff elimination for pharmaceutical products and for chemical intermediates used in the production of pharmaceuticals. As noted, if the Trump administration had real ambition here, it would roll up the ITA, the Pharmaceutical Goods Agreement, and the proposed Environmental Goods Agreement into an Innovation Technology Agreement that pursued zero tariffs on goods and their component inputs across all high-tech industries for participating nations. Indeed, reciprocal tariff relations among nations make the most sense when those tariffs are at zero.

The Trump administration should also ensure that other nations pay their fair share for innovative medicines. As H.E. Frech et al. have suggested, for example, “US officials could raise these issues at international negotiations and advocate for higher prices than presently set in high-income ROW countries. A multi-country agreement in this direction would represent a serious effort to support improved world health.” In the absence of that, the United States should file a WTO case based on the complaint that price controls on the pharmaceutical sector violate IP rights because they enable international arbitrage through parallel trading.

The U.S. Constitution empowers Congress to set import tariffs, although Congress has largely delegated that power to the executive branch. Still, Congress retains an essential voice in guiding U.S. tariff and trade policy. The Trump administration is invoking the International Emergency Economic Powers Act (IEEPA) as the basis for many of the tariffs it has proposed, including those on Canada and Mexico. But Congress intended IEEPA, originally enacted in 1977, to be used only in times of genuine national emergency—such as an actual war with the Soviet Union—and certainly not as a basis for tariffs on FTA partners or as a catchall justification for blanket tariffs of the type the Trump administration has proposed.

As such, Congress should pass the Stopping Tariffs on Allies and Bolstering Legislative Exercise of Trade Policy Act (STABLE), proposed by Tim Kaine (D-VA) and Senators Chris Coons (D-DE), which would institute a requirement of congressional approval before a president could impose new tariffs on U.S. allies and FTA partners.

Congress could undertake some additional productive legislation. Congress should charge USTR with working with willing allied partners to develop a full “China Bill of Particulars” report. As this report documents, China is the world’s most significant trade scofflaw. Accordingly, the United States needs to spearhead development of a collaborative report with allies that comprehensively documents the extent of Chinese mercantilist unfair trade and domestic economic and technology policies. Many of these have been noted, albeit in a piecemeal manner. Although it should also be noted that all foreign-nation exporters into the EU would pay a similar VAT.

Congress should amend, and the administration should use, Section 301 of the Trade Act of 1974 to target digital trade issues. Congress should amend a key U.S. trade defense tool—the Trade Act of 1974—to respond to the digital barriers central to modern trade. The law should detail the responsible agency and process (i.e., the actions, such as licensing, certification, or legal judgment) whereby the administration can impose specific retaliatory measures on a foreign service provider. The administration also should use Section 301 of the Trade Act to initiate an investigation of Europe’s DMA, which has been used to target and penalize U.S. tech firms. Section 301 can be used to enact tariffs, taxes, or restrictions on EU digital service companies doing business in the United States.

Congress should amend the Internal Revenue Code to allow authorities to impose mirror taxes on countries imposing Digital Service Taxes on U.S. firms. Section 891 of the Internal Revenue Code allows the president to retaliate against foreign discriminatory or extraterritorial taxes by taxing foreign citizens and firms. Congress could adapt this code by mandating a tax on the global revenues of large firms based in countries imposing DSTs, such as Italy and France, as a retaliatory measure against the discriminatory taxes placed on American tech firms. These mirror taxes could be legislated to expire upon either of two events: agreed international rules that subject tech giants to taxation in countries reached by their platforms or, in the case of an individual country, repeal of its own DST tax.

Congress should require U.S. aid to be contingent on countries not engaging in digital protectionism. Since the end of WWII, U.S. foreign aid programs have ignored foreign mercantilist practices that harm U.S. techno-economic interests, and that is no longer acceptable. Congress, with its oversight of various federal aid programs, should investigate and require that these agencies limit funding to countries engaging in digital mercantilism or IP theft. Specifically, development aid through the InterAmerican Development Bank or the World Bank should be contingent on nations limiting digital protectionism wherever possible.

Conclusion

The Trump administration has made it clear to global trade partners that sustained unfair trade practices deleteriously impacting U.S. enterprises and industries will no longer be tolerated. The increasing global proliferation of mercantilist practices certainly provides the Trump administration with a “target-rich” environment of trade scofflaws. But the administration should focus the most attention on countries where U.S. industries face the worst trade distortions and imbalances, and where action can most significantly advance U.S. economic interests. As such, this report shines a light on the countries—China, India, and the European Union—that the Trump administration should first prioritize in rebalancing U.S. trade and economic interests.

Appendix 1: Methodology

The country index scores were calculated by taking the raw score of each of the 11 indicators for the top 48 nations with the highest GDP. The raw scores originated from various sources, including the Chamber of Commerce, the U.S. Census Bureau, and the World Bank.  The mean and standard deviations were then calculated using each indicator’s raw score before the raw scores of each nation were standardized to find a z-score. The z-scores indicate the number of standard deviations an indicator’s raw score is compared with its mean value. The z-scores for each indicator were then weighted. Finally, the weighted z-scores were summed together to obtain an overall score for each nation.

The 15 European Union nations in the top 48 nations with the highest GDP were combined into a collective country variable of European Union. The European Union variable was calculated by taking the share of GDP each nation contributed to the overall European Union’s GDP and then weighing the indicator score for each nation by those weights. Finally, the weighted indicator scores for these nations were summed together. As noted, Russia was excluded from the report on the amount of trivial two-way trade (just $3.5 billion in 2024) occurring between Russia and the United States in the wake of the Russia-Ukraine war.

ITIF weighed each indicator’s standardized scores to reflect their importance. The USTR 301 Watch List and International IP Index indicators had a weight of 0.75. The extent of pharmaceutical price controls, DMA law, DST, NTBs, Services Trade Restrictiveness Index, simple mean tariff rates for all products, antitrust fines, and digital economy fines on U.S.-based companies (noncompetition) indicators had a weight of 1. The 2023 trade balance of goods and information services had a weight of 3.5. 

To read the report as it was published on the Information Technology & Innovation Foundation’s website, click here.

To access the full PDF as it was published, click here.

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In contrast, Kamala Harris is not expected to prioritise trade, at least in the early part of her Presidency. Her approach would largely continue the Biden administration’s “worker-centric” trade policies, emphasising sustainable and fair trade practices, with a focus on human rights, labour, and environmental standards. Harris would likely pursue strategic partnerships and multilateral frameworks, though she would also be willing to use tariffs selectively, particularly against China, to safeguard American jobs and industries, thus also not complying with multilateral rules.

Both candidates share concerns over avoiding China to become the new superpower and protecting the US economy, although Trump would likely pursue a more radical decoupling strategy. Neither administration is expected to prioritise free trade agreements, and multilateral engagement, especially with the World Trade Organisation (WTO), would be deprioritised under both candidates.

The European Union (EU) must prepare for an increasingly inward-looking US trade policy, regardless of the outcome. Under Trump, EU-US relations would likely face heightened tensions, with tariffs, trade disputes and a reshuffling of value chains significantly affecting EU exports and economic growth. A Harris Presidency would offer more stability, but EU-US relations may still be marked by cautious cooperation, particularly in addressing global trade challenges posed by China.

Key recommendations for the EU include balancing short-term and long-term priorities: deepening the EU cohesion allowing it to respond to unilateral aggressive initiatives, while deepening transatlantic cooperation through platforms like the Trade and Technology Council (TTC), strengthening ties with like-minded democracies, and adopting a unified approach to counterbalance US pressure. The EU should also continue its leadership in modernising global trade rules through the WTO.

To read the policy paper as it was published on the Jacques Delors Institute webpage, click here.

To read the full policy paper, click here.

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Over the past few years, the United States has made the most significant change in its approach to trade in generations. Starting in the 1970s, trade policy was focused on neoliberal priorities such as promoting efficiency through tariff and cost reductions and limiting the space for purely national regulation of commerce. This was done with an eye toward benefiting multinational corporations and with the view that trade was primarily a tool for advancing the foreign policy interests of the US (and its image as a global leader). Other goals, such as the quality of domestic jobs or environmental sustainability, were an afterthought. In recent years, however, a new set of values has started to guide US engagement with the global economy, with working class power, climate sustainability, and supply chain resilience at the core of a new approach to global leadership.

While evidence of this new approach can be found throughout the executive branch, it is perhaps most clearly evidenced in the Office of the US Trade Representative (USTR) under the leadership of Ambassador Katherine Tai. Since assuming office with the unanimous, bipartisan support of the US Senate in March 2021, Tai and her agency have laid out an ambitious new US trade policy agenda—one that has started to bear fruit for workers, industries, and the environment.

To take stock of these changes, the Roosevelt Institute convened a study commission of scholars, former policymakers, and labor leaders. Some are longtime trade experts, others economic policy generalists with a bird’s eye view of how trade connects to other economic policies. We sought to better understand how trade policy got to where it is and to sketch out ways this trade agenda could be refined and expanded by future policymakers. This stocktaking report summarizes our takeaways from the commission. However, nothing here should be taken as consensus recommendations or the group’s full range of ideas for the future of trade policy. Rather, the report represents our attempts to identify—through a group-informed process—fruitful areas for analysis and action in the months and years ahead.

The report is divided into three sections based on the following themes:

1. Producing what matters: Trade policy should be in service of the emerging theory of economic growth, rather than pursued for its own sake. Future trade negotiations should focus on problem-solving around production challenges in specific sectors, with the goal of deepening competition and promoting sustainable economic development at home and abroad.
2. Consuming with purpose: Past trade policies have been sold through emphasizing their benefits to US consumers in the form of lower prices. The new strategy organizes American consumers to use their collective strength as a $3.8 trillion import market (the world’s largest) to push countries, producers, and importers to follow high-road practices. In other words, access to the US market is a privilege, not a right, and “consumption power” through trade enforcement is how the privilege is managed.
3. Personnel is policy: Who serves in government and who government consults is vital to good policy outcomes. Trade policymakers, career staff, and expert advisors should be willing and able to build on this new trade policy model and should reflect America’s full diversity.

Foreword

By Felicia Wong, President and CEO of the Roosevelt Institute

In planning this first-of-its-kind study commission on trade policy and the Office of the US Trade Representative (USTR), the Roosevelt Institute team asked: Why us, and why now?

First off, it is our job to lift up and celebrate the legacy of Franklin and Eleanor Roosevelt. They remade the US and global economy in much the same way that the Biden administration is trying to do today, by rewarding work and not wealth, using the public sector to shape markets, and preserving our natural resources. These efforts are very much in line with the ideas and initiatives that have been developed at USTR under Ambassador Katherine Tai’s leadership.

Second, establishing better trade policy has been a core part of the Roosevelt Institute’s work. It featured as a theme in our flagship 2015 Rewriting the Rules report. After trade dominated the 2016 election cycle, we held extensive convenings with Open Society Foundations, New America, the Center for American Progress, and other partners to better understand the fault lines and opportunities around the issue. Trade was core to my own work as the US representative on the G7 Panel on Economic Resilience in 2021, and has been a regular part of the portfolio of Roosevelt’s own in-house experts including Joseph E. Stiglitz, J.W. Mason, and Todd N. Tucker. Indeed, a glance at our 2017 Sustainable Equitable Trade report will show how a series of Overton-window pushing recommendations from that time have now become conventional wisdom: the value of directing the benefits of trade to regions of the country left behind by globalization, greening production, putting guardrails around corporations’ privileges, and finding new bases for international cooperation with other democracies. 

Third, since 2015, Roosevelt has run a personnel project—part of what we now call the Roosevelt Society—that helps develop a pipeline of exciting and innovative people from the academy and civil society and into government. We are pleased that a number of our past and present fellows have served in government and were able to join the study commission, including Joelle Gamble, K. Sabeel Rahman, and Sameera Fazili. 

Finally, and most importantly, we believe that now is the right moment to have a deep conversation about trade and how it fits in with the emerging US economic strategy. The COVID-19 pandemic, climate crisis, exploding inequality, and precarious supply chains have brought into question much of the received wisdom about globalization. The US has begun charting a new path with increasing bipartisan support, but the exact contours of this path are still ripe for mapping.

In fact, much of the initial criticism of the US’s industrial policy from trading partners has subsided, suggesting that the breaking of established economic norms was both significant and broadly understandable once explained. It is thus no coincidence that many of the US’s closest partners and allies are considering or implementing similar industrial policy packages.

We hope that this study commission serves as a template for future evaluation of making government agencies deliver equitable economic policy for all Americans.

Todd N. Tucker is a political scientist and director of industrial policy and trade at the Roosevelt Institute, where he helps lead research on how to build state capacity and supply chains. He is author of Judge Knot: Politics and Development in International Investment Law (Anthem Press), and received his PhD from the University of Cambridge. His popular writing has been featured in Politico, Time, Democracy Journal, the Financial Times, and the Washington Post. He served as special rapporteur for the expert Study Commission.

To read the report as it was published by the Roosvelt Institute, click here.

To read the full report as a PDF, click here.

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After four years of President Trump’s slash-and-burn trade policy, the bar for the incoming Biden administration could hardly have been lower. Trump’s “America First” bravado was an ungainly amalgam of tax hikes (against foes and friends alike), bilateral power plays (for example, Trump ordered the “renegotiation” of the Korea-US Free Trade Agreement [KORUS], otherwise threatening termination of what he termed “a horrible deal”), and a retreat from international trade cooperation (among others, spurning the megaregional Trans-Pacific Partnership [TPP] and undermining the World Trade Organization [WTO]). Trump’s trade policies not only ruffled the feathers of many of America’s closest trade partners, but they were also economically ineffective. Notably, they failed to benefit even those sectors and locations that his tariffs were supposed to protect. Ironically, the Trump tariffs did not change China’s behavior one bit.

A “New” Washington Consensus

It came as no small surprise when President Biden, despite calling Trump’s trade actions “disastrous” and “reckless,” not only failed to repudiate those policies, but actually amplified them. This is not to say that Trump’s and Biden’s versions of economic nationalism are equivalent. Trump’s style was all sticks and no carrots—belligerent, scattershot, and ad hoc. Biden’s version, albeit no less fervent, is soft-footed and polite—more carrots than sticks; commentators have called it “polite protectionism” or “pragmatic unilateralism.” Most notably, Biden provides a coherent intellectual superstructure that ties his administration’s trade policy to its overall international economic strategy.

In a scarcely noticed but consequential speech in July 2023, National Security Advisor Jake Sullivan outlined the Biden administration’s economic ideology. Sullivan blamed the United States’ most pressing challenges—namely, a hollowed-out industrial manufacturing base, dramatic economic inequality between rich and poor and between coast and heartland, the economic and military rise of China, and the climate crisis—on a number of factors including hyperglobalization, unfettered deregulation, naive beliefs in trickle-down economics and market efficiency, and trade liberalization as an end in itself. Drawing a sharp contrast to the 1990s-era policy package known as the “Washington Consensus”—championed by the US Treasury, IMF, and World Bank—that according to Sullivan encapsulates the idolatry of free markets and liberalized trade, he declared that the Biden administration stood for a “New Washington Consensus.” To address the above-mentioned challenges, the administration’s novel paradigm is aimed at achieving supply-chain resilience in strategically important sectors, a return to former manufacturing grandeur, more equitable growth that benefits American workers, rapid decarbonization and a successful transition to green technologies, and a containment of China’s military and economic might.

Few Americans would disagree that these are worthy goals. It is, however, the implementation of these goals that warrants scrutiny: Sullivan stated that this “New” Washington Consensus was to be effectuated by a policy bundle including (1) a “modern American industrial strategy,” (2) selective partnerships with economic allies, and (3) various policies aimed at curbing the ascent of China. In the following, I argue that each of these three strategies is fraught with peril. In addition, I show that this alleged new “consensus” does not reflect unanimity between the United States on the one hand and its trade allies on the other, but rather constitutes a unilateral move to undo over six decades of trade liberalization. In the final section, I propose an alternative to the so-called “New” Washington Consensus—an alternative set of policies that achieves better results for the United States and remains in the four corners of a rules-based global trading order.

Biden’s Industrial Policy: Subsidies on Steroids

Let us start with the first pillar of the “New” Washington Consensus, Biden’s industrial policy. It is a mix of muscular government interventions that consist of the following:

• direct subsidies and tax credits, enacted through the Inflation Reduction Act (IRA), the Creating Helpful Incentives to Produce Semiconductors Act (CHIPS Act), and the Research and Development, Competition, and Innovation Act—all targeted at industries deemed especially critical or strategic, mainly semiconductors and green technologies;
• “Buy America” provisions for government procurement;
• favorable loan terms; and
• protectionist trade policies, including continuation of many Trump-era tariffs, domestic content requirements, and so-called trade defense measures (intended to punish alleged foreign dumping and—irony of ironies—to counter foreign subsidies that affect exports to the United States).

True to its promise, in mid-May of this year the administration slapped new tariffs up to 100 percent on Chinese electric vehicles, advanced batteries, solar cells, semiconductors, steel, aluminum, and medical equipment, thus affecting imports of green and clean tech goods in excess of $18 billion. (These new tariffs, notably, are imposed on top of the still active across-the-board import tariffs on some $350 billion in Chinese goods originally imposed by the Trump administration, which cost US consumers and downstream industries $48 billion annually, and that entail welfare losses of at least $1.4 billion per month caused by reconfigurations of US supply chains and an overall reduction in the availability of imported varieties.)

While industrial policy done right can be useful, all indications are that Biden’s version is poised to cause significant domestic and international damage. This is not the place to offer a fulsome critique of the risks that Biden’s industrial-policy package poses for the domestic economy. Suffice it to say that the package is costly (experts expect IRA subsidies to be $1.2 trillion over the next decade—three times more than initially forecast), which in and of itself is not fatal if the returns are adequate. However, the returns may not be adequate.

First, there is the challenge of getting industrial policy right. It is difficult for any administration, let alone that of the world’s biggest economy, to pinpoint the precise industry targets and provide the appropriate amount of incentives. The range and depth of knowledge that the Biden administration must possess in order to implement successful industrial policy is extraordinary. It not only must know and understand the relevance of broad-ranging and complex questions, but it must also undertake weighing alternatives and prescribing an adequately supported policy mix. These are skills rarely found in the private sector, let alone in the civil servantry. Even highly trained (and remunerated) portfolio managers who specialize in single industry stocks, as well as industrial conglomerates themselves, oftentimes founder at even a fraction of the tasks required to design successful industrial policy.

Second, there is the difficulty of achieving the objectives of the industrial package. It is not at all clear how Biden’s policies will undo 30 years of lost manufacturing edge, out-subsidize Chinese production of semiconductors and green technologies, and re-shore entire value chains for these sophisticated technologies. In fact, it appears that even evaluating applications and distributing approved funds already strain the system. For example, well over a year after passage of the CHIPS Act, many recipients are still awaiting funds. (Worse still, a significant chunk of the promised funds are unavailable: the Federation of American Scientists reports an appropriations gap of $8 billion for the R&D portion of the CHIPS Act, thus leaving core national and regional science, research, and education projects underfunded.)

Third, even if Biden were to overcome these nontrivial roadblocks, it is the unintended consequences of industrial policy that are the most troubling aspect of the administration’s industrial policy package: For one, industrial policy creates numerous distortions in those industries that receive subsidies and trade protections. These distortions include anything from monopolization (or oligopolization) in protected markets to favoritism and political horse-trading, inadequate supervision of policy implementation, entitlements (once granted, subsidies tend to stick around long after the policy objectives have been achieved), and cascading protectionism. These unintended consequences more often than not result in growing complacency, reduced productivity, and less innovation in subsidized sectors.

More critically, strategic support of some industries and not others crowds out resources otherwise allocated to export-oriented firms and industries in which the United States has an international comparative advantage (i.e., lower costs or superior quality). Apart from not getting handouts, unsubsidized industries also face higher relative costs—for employees, capital, and raw and intermediate materials. Notably, the unsubsidized export-oriented firms are the ones that are most agile, productive, and innovative, and thus most able to bring about decarbonization, supply chain resilience, national security, and better wages.

In the end, Biden’s industrial policy tied to specific industries and localities is unlikely to create jobs (instead, it merely shifts them from export industries to protected industries), let alone unionized jobs in the heartland (a region that already suffers from a crippling dearth of skilled labor). It is furthermore unlikely to boost overall US economic growth beyond the initial spending bump. It is, however, likely that the real results of Biden’s industrial policy are higher consumer prices, accelerating inflation, and an overall loss of US competitiveness.

Domestic effects aside, Biden’s industrial policy also has negative international repercussions. First, many of the industrial policies violate the very trade principles the United States championed when it helped form the WTO. In a way, the United States therewith forgoes its privileged position in promoting and developing trade rules abroad (and legitimately enforcing those rules). It certainly forgoes any legitimacy in disciplining behavior abroad that the United States itself has implemented at home.

Second, Biden’s industrial policy is essentially self-dealing. It is designed to draw investment, production, and raw materials away from other countries. This zero-sum logic will almost definitely provoke an international backlash. Let us start with those countries that can afford to pay subsidies to domestic industries. Powerful countries will retaliate, emulate, or, in rare instances, negotiate. None of these responses are good news for the US economy, as is obvious in situations where countries retaliate against US exports of goods and services (recall, for example, China’s reaction to the Trump tariffs). When other countries emulate our discriminatory industrial policies, the harm to the US economy may be particularly pronounced, because it again shuts out US exports and may easily trigger lose–lose subsidy wars in which too-big-to-fail national champions compete on the world stage. In addition to being costly to the supporting countries, subsidy wars also tend to stifle innovation and technological diffusion, which would be particularly bad for accelerating a green energy transition. Losses to the US economy are smallest in cases in which powerful trade partners manage to negotiate preferential access to the US market (for example, the European Union [EU] managed to extract concessions for its electric vehicles to benefit from certain IRA subsidies). Yet, imports still risk being more expensive, and potentially of lower quality compared to imports entering under a nondiscriminatory policy alternative.

Next, consider the reaction of poorer countries that cannot afford costly subsidy programs. These countries will see shrinking export markets and inward investment, and thus less developmental progress. They will find themselves hat in hand, begging for access to the US market, to become part of US supply chains, or at least to be able to export raw or processed materials. This is guaranteed to breed mistrust and resentment against the United States and may draw these poorer countries toward other trade alliances.

Biden’s Strategy for International Cooperation: Milquetoast

Let us now turn to the second policy prescription of the “New” Washington Consensus: Biden’s strategy for cooperating with trade partners and allies. The good news is that the Biden administration, as opposed to its predecessor, actually sees virtue in international cooperation. That said, it is instructive to note what Biden’s trade cooperation strategy does not include: it entails no aspirations to pursue either traditional trade agreements (such as rejoining the TPP or finalizing the Transatlantic Trade and Investment Partnership [T-TIP] with the European Union). It entails no ambition for a revitalization of the multilateral trading order. On the contrary, Biden has continued Trump’s expansive assertion of national security exceptions to justify trade restrictions and has dialed back US ambitions for ongoing trade negotiations in key areas such as digital trade.

The United States under Biden has championed sectoral partnerships (such as the critical minerals agreement negotiations initiated with allies Japan and the EU) and so-called framework agreements (such as the Indo-Pacific Economic Framework for Prosperity [IPEF]). What is common to these types of agreements is that the United States is not willing to make concessions, particularly market access concessions, to foreign goods and services. Rather, the sectoral partnerships championed by the United States are solely based on areas of common interest. Some sectoral partnerships deal with financing infrastructure projects in the region, others with developing secure supplies of minerals needed to make advanced electronics or writing agreements to facilitate digital commerce. Some are mutual accords to exclude, or induce behavior changes of, third parties (as with the planned Global Arrangement on Sustainable Steel and Aluminum [GASSA] with the EU that limits access to US and EU markets for “dirty” Chinese and Indian steel). While these sectoral agreements can be quite effective, they may not always be WTO compliant.

As for the negotiations of framework agreements, the US strategy largely involves the attempt to extract commitments on environmental or labor standards from trade partners. In addition, the Biden administration aims at negotiating mutual recognition of existing procedures or standards.

All of this is weak tea, because the United States is not willing to give something to get something. There is no incentive for other countries to adopt proposed principles (besides those that are in their interest anyway). The last IPEF summit in November of 2023 predictably collapsed because the United States asked developing countries to give up comparative advantages (cheaper labor and laxer environmental rules) for nothing in return. Under the current mindset, one may reasonably expect that future “trade” agreements will be less about trade and more about forging political and security relations and thus may easily become subject to political whims and maneuvers. Trade agreements motivated by politics, rather than economics, may jeopardize, rather than strengthen, supply-chain efficiency and resilience. Moreover, they risk being fair-weather accords—purely transactional bargains that can be violated or revoked at no cost at any time. While those weak accords help further Biden’s domestic agenda that shields US industries from global competition, it is anyone’s guess how such trade deals will ultimately benefit US workers, make supply chains more resilient, or result in decarbonization.

Moreover, the US disinterest in reciprocal trade liberalization drives countries that still believe in liberalized trade and the efficiencies it entails into the arms of US rivals. Case in point, while the United States is sitting on the sidelines, the EU is in the process of finalizing a trade deal with Mercosur, while the United Kingdom is engaged in negotiations with eight countries in parallel. China is also aggressively pursuing new trade agreements, such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), TPP’s new name after the United States’ exit.

Biden’s China Strategy: Go It Alone

Finally, arguing that China pursues aggressive economic policies and has flouted international trade rules, either in letter or in spirit, the Biden team has set an objective of slowing down China’s economic and military ascent. Yet the United States cannot single-handedly take on China, even if the US objective is not decoupling but derisking, as Sullivan claims (although some commentators have questioned Washington’s derisking stance in light of the administration’s latest tariff escalation affecting Chinese clean tech). If the United States acts alone, China itself may decide to decouple, racing to find different markets for its exports, to develop different sources for critical imports, and to push technological advances at home to reduce dependency on the United States. Needless to say, a decoupling that goes too far too soon would be to the detriment of US companies, could jeopardize Biden’s green revolution, and could potentially even affect US military and intelligence capabilities. Focusing on export controls against China (only one policy in the US trade toolkit), a recent paper by the New York Federal Reserve estimates that US firms affected by export controls face declines of revenues by 8.6 percent, profitability by 25 percent, and employment by 7.1 percent (while, unsurprisingly, China substitutes US imports for non-US suppliers and domestic firms).

To be effective in pursuing its objectives vis-à-vis China, the United States needs to deepen relations with key allies and present a united front against violations of the international trading system. It is then all the more puzzling that the Biden administration continues to weaken, rather than strengthen, important alliances it relies on to effectively pursue its China objectives with minimal economic blowback. Examples abound: the “pause” on US liquefied natural gas exports that sent shockwaves through the EU; the quiet shelving of a US–UK trade agreement; or President Biden’s opposition to the nonhostile acquisition of US Steel by Japanese market leader Nippon Steel, stating that “it is vital for [US Steel] to remain an American steel company that is domestically owned and operated.”

“New” Washington Consensus, or “Washington Consensus 2.0”?

It is not clear whether President Biden’s trade stance is owed to political exigencies or personal conviction. It may also be that Biden is simply unable to stave off a seismic shift toward economic populism and nationalism in US economic policy that is bigger than either Trump or Biden. Be that as it may, it is not an exaggeration to note that the Biden administration’s “New” Washington Consensus is nothing short of a challenge to at least five decades of economic orthodoxy. It is exclusionary and anti-export. It weaponizes trade to achieve domestic and security goals. It is also a rejection of a rules-based international economic order in which the United States used to have a leading role and that served it well for decades. The “New” Washington Consensus no longer represents the belief that international trade is a win-win for all countries. Instead, it espouses a zero-sum logic whereby one country’s gain is the other’s loss and cooperation is ad hoc and transactional—cooperation is pursued if and when it suits US interests. This new strategy is myopic short-term thinking—it risks precipitating the disintegration of global trade into rivaling blocs, with the United States and China in opposing camps and other countries in the uncomfortable position of having to pick sides. And given the US protectionist stance, what is the incentive for third countries to join the United States?

International trade currently is unpopular with Americans from the nationalist right to the progressive left (35 percent of Americans see international trade as a threat to the economy, while only 61 percent see it as an opportunity). Advocates for international trade certainly are not blameless here: In the past, they have overhyped the gains from trade agreements while underestimating distributional costs on lower-skilled labor, and they failed to anticipate localized recessions resulting from international competition. However, instead of yanking the pendulum toward neo-protectionism and techno-nationalism, one may consider updating and improving the existing rules-based order—call it Washington Consensus 2.0.

What would a Washington Consensus 2.0 look like? Domestically, it would capture the gains of liberalized trade, while offering effective protection from the downsides of globalization. The focus thereby would be on workers, not jobs. Rather than trying to save uncompetitive facilities and declining industries, the Washington Consensus 2.0 would promote job creation in distressed areas and improve transition assistance for those who have lost their jobs to international competition and technological advance. The Nordic countries and New Zealand teach us that an economy can be open and egalitarian at the same time. A Washington Consensus 2.0 would foster (WTO-compliant!) investment in infrastructure, R&D, education, and talent attraction, rather than bet on handpicked industries (one step in the right direction is the Bipartisan Infrastructure Law, passed under Biden’s watch in late 2021, though it remains diffuse and incongruous). Comparative advantage cannot be compelled with handouts and protection, but it can grow organically given the intellectual and infrastructural fertilizer. A Washington Consensus 2.0 would mean focusing on technology adoption, not technology production: Diffusion and adoption of the best available technologies (even if imported) is more likely to create long-lasting economic benefits and larger innovative breakthroughs than a government trying to pick winning technologies (on that issue, recall France’s irrational, and costly, attachment to the telex at a time when the rest of the world was already using the internet).

Internationally, a Washington Consensus 2.0 would mean more and deeper trade agreements since it is better to coordinate, not compete, with allies on public investments in complex areas such as high tech and decarbonization. This cooperation would remove commercial conflict and facilitate the spread of the best technologies. The United States should seek out comprehensive and enforceable trade agreements with a large membership, such as the TPP and T-TIP, not only to provide a veritable counterbalance to China’s heft—as originally intended by the Obama administration—but also to help promote technological diffusion and adoption of common international technical standards (including on labor, the environment, and AI). A Washington Consensus 2.0 would mean an immediate deblocking of WTO dispute settlement and a redoubling of efforts to engage in (an, admittedly, overdue) WTO reform that takes on rule flaunting by developed and developing countries alike. And if any WTO member were to block meaningful WTO reform, the United States should assemble the largest possible coalition in a future-oriented club of the willing (e.g., climate club).

International trade is here to stay. The question is to what degree the United States will participate in it and whether the US will resume its leading role in defending the ground rules of global trade. Historical evidence shows that expanding trade has delivered tremendous value to the US economy. A Washington Consensus 2.0 could convince Americans that being protrade is neither unpatriotic, nor antiworker, anticlimate, or hypercapitalist. Being protrade means being in favor of a system that rewards innovation, efficiency, and dynamic growth; that makes the distributable pie larger; that actually attempts a fairer distribution of the spoils of trade; and that advances US diplomatic, security, and economic interests in the long term.

Simon Schropp is a managing economist at the global law firm Sidley Austin LLP. He previously worked for the World Trade Organization (WTO) Secretariat.

To read the full policy brief as published on the website of George Mason University’s research center, the Mercatus Center, click here.

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Why 10 percent? Why all countries? There is no other reasonable explanation than that Trump considers all trade to be “unfair” in some respect, or at least disadvantageous.

This isn’t normally the way presidents act when it comes to tariffs. Additional tariffs are generally imposed very selectively, under trade remedy statutes crafted by Congress. They are actions taken pursuant to a finding that a particular product is involved in a specified unfair trade act, or it may be that the new tariff is a surgical retaliatory measure to open a market for a specified American product.

Many uncertainties surround Trump’s proposals.

We don’t know why 10 percent was chosen or why it would remain at 10 percent once imposed, but we do take Trump at his word on tariff matters—think about his fulfilling his pledge on day one of his time in office to withdraw the United States from the Transpacific Partnership (TPP) negotiated by President Barack Obama with Asia Pacific countries. He also already applied tariffs at a level of his choosing, first to steel and aluminum imports, and then to most imports from China, which netted out to 19 percent, a third of what he is promising now.

But didn’t President Biden just put on massive tariffs on Chinese goods? It is true he kept his predecessor’s blanket China tariff and then added some very high selective tariffs of his own. The new Biden tariffs place 50 percent tariffs on semiconductor imports from China. But that trade is modest, just under $1 billion a year. This compares with US chip imports from all sources that amount to about $6 billion each month.

The number of Chinese EVs being imported into the United States is even harder to detect (most press articles on the new tariffs on EVs contain no data), but only about 2,000 of these vehicles entered the United States from China in 2024 Q1. The EV tariff is a pre-emptive strike against these imports, not because they caused injury to the domestic automobile industry, but because they might prevent the industry being served by domestic American companies. The 100 percent tariff could be circumvented. Transplants could come in, but the United States, as opposed to France, has not put out the welcome mat for Chinese car investment. The bottom line is this new Biden measure affects $18 billion in trade coverage at present, as compared with total US merchandise imports of $ 3.826 trillion in 2023.

There is no reason to assume that the US tariff would not be met with additional foreign tariffs. The European Union, Canada, and Mexico retaliated immediately when Trump put on the steel and aluminum tariffs in 2018. Does the United States then go another round of escalating tariffs at that point? Or does it all get sorted out, as it did pretty much in that case? Even so, it is high stakes game, and what is at stake is the health of the US economy and that of the rest of the world.

The indiscriminate imposition of tariffs would no longer be confined to a trade war with China, if that is where the United States is headed, but a war against trade itself. It is time to remember some largely forgotten economic history. Fifty years ago, in 1970 when the Congress was considering import quota legislation, trade speeches were larded with allusions to the dangers of Smoot-Hawley level tariffs and “beggar-thy-neighbor” policies. Everyone knew then what those terms meant. The 1930 Tariff Act was a bidding war of members of Congress trying to give import protection to their constituents. The Congress, which under Article I of the US Constitution has authority over commerce, raised tariffs on imports to an average of 47 percent. This caused immediate retaliation from about a dozen countries, including Canada and Mexico. A year later, Great Britain abandoned its free trade policy, authorizing its Board of Trade to impose tariffs of up to 100 percent of value. The Board imposed tariffs of up to 50 percent immediately. Economists agree that high tariffs broadened and deepened the Great Depression, when US unemployment reached 25 percent and we nearly lost our democracy.

These are not yet the conditions we face today. US tariffs average around 3 percent, and unemployment is under 4 percent. Despite the headline-grabbing numbers for the high Biden tariffs, this is not Smoot-Hawley.

Unlike the Biden tariffs, the Trump plan is for increased tariffs on all products from all countries. It is not just America First; it is America Alone. Politicians and the public, here and abroad, are getting used to the idea of having higher tariffs, de-sensitized to the fact that high tariffs ought not to be the new normal. They are in fact added taxes on us, and having them will have real costs.

Beyond this, there is a risk of contagion. US treasury secretary Janet Yellen has invited other countries to follow the United States in its imposition of China tariffs. Given that there is an undeclared US trade war with China, this is not surprising, although it is not normal for modern secretaries of the treasury to be tariff proponents. Europe is also expected to act by putting into place much milder tariffs on EVs from China. This is likely be followed by a Chinese response in kind, already being bruited about, affecting luxury autos. Where would this end?

The impact of an unlimited trade war between the United States and China is one thing. China accounts for 16.5 percent of US imports, still relatively small compared with the nation’s experience in 1930. But the next administration, depending on the outcome of the election, could be working on building tariff walls, this time against world trade.

Only trade experts can readily tell that the two, Trump and Biden, are not using tariffs in the same way. The American public and foreigners looking on can be excused if they don’t see a difference. In the 1930s, President Franklin D. Roosevelt led the way back from Smoot-Hawley and blanket trade protection. A second Trump administration, freed from an awareness of history, may lead the world toward experimenting with blanket protection, tight-rope walking over an economic abyss. If Biden, sometimes compared to Roosevelt because of his federal programs, is given a second chance, he will need to be clear that his trade policies will be designed to be good for America and good for America’s friends abroad. The American president was formerly seen as “leader of the free world.” That honor requires a trade policy that other nations can emulate, that can be both to their advantage and ours.

Alan Wm. Wolff is a distinguished visiting fellow at the Peterson Institute for International Economics.

To read the full blog piece published by the Peterson Institute for International Economics, click here.

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The US is mulling an end to the de minimis provision that allows shipments valued under US$800 to enter the world’s largest consumer market, a move largely aimed at Chinese exports. Such a move would escalate a raft of trade controls Washington has already placed against China, including controls on semiconductor technology and outbound investment.

In many ways, a key piece of legislation impelling the momentum is the US Uyghur Forced Labor Prevention Act (UFLPA). Passed in late 2021, the ambition of the UFLPA is far more comprehensive than the “small yard, high fence” scope of containment policies, as it seeks to restrict imports in toto from an entire region inextricably linked to global supply chains. Growing political pressure and technical know-how within the retooled oversight agencies portend much more robust UFLPA enforcement across a growing category of goods.

This is likely to be one of the more conspicuous developments in the US’ international trade posture in 2024. The Biden administration signaled last week that it may escalate controls on China’s access to sophisticated semiconductor technologies, as Commerce Secretary Gina Raimondo vowed “we will do whatever it takes.” Alongside these tech controls, Washington has existing policy weapons it could use to target the extent to which Xinjiang is embedded in global supply chains, including in strategic industries suffused with Chinese overcapacity. Early signs of enhanced enforcement action suggest a particular focus on the automotive sector.

Henry Storey is a senior analyst at Dragoman, a Melbourne-based political risk consultancy. He is also a regular contributor of The Interpreter published by The Lowy Institute.

To read the full article published by the Hinrich Foundation, click here.

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It is taking steps to rebalance its position in the global economy. While seeking to preserve the benefits of interdependence with the rest of the world, the European Union is contemplating policies that would induce change. One change seeks to alter the footprint of global production for certain goods, affecting whom it sources imports from and whom it sells exports to. It wants to decrease certain trade dependencies (which could be weaponized) and increase others (to encourage diversification). A second change is the enactment of new contingent policy instruments intended to allow the European Union to respond more quickly when policymakers in other countries act badly (or to establish a credible threat sufficient to deter them from doing so in the first place).

This paper describes how the European Union is seeking to use trade and industrial policy to achieve its economic security objectives. It identifies some of the economic costs and tradeoffs of using such policies. Because the issues it examines—many of which are noneconomic, for which reasonable estimates of costs and benefits are lacking—are evolving, the paper shies away from normative recommendations. Instead, it explores the political economy of what is emerging and why. The paper focuses on EU efforts to “de-risk” vis-à-vis China especially, given the emphasis EU policymakers now place on doing so.

The paper is organized as follows. Section 2 defines the concept of economic security and the events that led it to play such a sudden and prominent role in modern policy. It provides some early evidence to motivate the new policy interventions but emphasizes that much remains unknown, especially concerning their design.

Section 3 explores a case study that highlights the difficult choices the European Union faces in responding to threats to its economic security. The case study involves the electric vehicle (EV) industry, the European Union’s potential use of trade defense instruments (TDIs) to address unfairly subsidized imports from China, and China’s potential retaliatory response of placing export restrictions on graphite, a critical material needed to manufacture EV batteries. It also identifies unknowns facing policymakers seeking “a clear-eyed picture on what the risks are,” in the words of European Commission President Ursula von der Leyen. The section also explores empirically whether the European Union’s trade interdependence with China may be deepening—despite stated goals to de-risk—in part because of the third-country effects arising from the US– China trade war.

Section 4 introduces the policy instruments the European Union, its member states, and other governments are pursuing to address concerns about their economic security. They include stockpiling and inventory management, investment or production subsidies, various forms of tariffs, export controls, and regulations on foreign investment. This section also highlights proposals for new policy instruments, analyzes the associated tradeoffs, and briefly describes basic World Trade Organization (WTO) rules that might discipline such instruments.

Section 5 turns to the potential for selective international cooperation over the use of such policy instruments. It explores how countries facing common concerns over economic security have been acting in coordinated fashion— implicitly or explicitly—and the difficulties of doing so.

Section 6 concludes with some caveats and lessons from history.

Chad P. Bown is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.

To read the abstract published by the Peterson Institute for International Economics, click here.

To read the full working paper, click here.

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Since its accession to the World Trade Organization in 2001, the CCP has pursued a multidecade campaign of economic aggression against the United States and its allies in the name of strategically decoupling the People’s Republic of China (PRC) from the global economy, making the PRC less dependent on the United States in critical sectors, while making the United States more dependent on the PRC. In response, the United States must now chart a new path that puts its national security, economic security, and values at the core of the U.S.-PRC relationship.

The House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party (Select Committee) has studied the PRC’s pattern of aggression and economic manipulation and recommends the following strategy for economic and technological competition with the PRC.

The strategy that follows is guided by three pillars:

First, the United States must reset the terms of our economic relationship with the PRC and recognize the serious risks of economically relying on a strategic competitor that harnesses the power of the Party-State to compete economically. While economic exchange with the PRC will continue, the United States government and the private sector can no longer ignore the systemic risks associated with doing business in the PRC or allow companies’ pursuit of profit in the PRC to come at the expense of U.S. national security and economic resilience. For over two decades, the U.S. government and businesses have sought access to the PRC as a market for consumer goods, a source of low-cost production, and a recipient of U.S. investment. In that time, the PRC has failed to live up to its trade promises, tightly controlled access to its markets, stolen hundreds of billions of dollars a year in technology and IP, and employed subsidies and unfair trade practices to squeeze out American competitors. These are not merely an assortment of separate moves made by individual actors but a feature of Beijing’s long-term strategy to harness the scale of its domestic market to achieve global dominance for PRC firms in critical technology and products and to make foreign countries, including the United States, dependent upon the PRC and subject to its coercion.

Second, the United States must immediately stem the flow of U.S. technology and capital that is fueling the PRC’s military modernization and human rights abuses. General Secretary Xi has made plain his intent to “resolutely win the battle of key and core technologies” and build the People’s Liberation Army (PLA) into a “great wall of steel.” At present, U.S. capital, technology, and expertise aid that effort. They support the PLA’s modernization, the CCP’s predatory technological goals, and genocide. The United States must change course. To quote Dr. Eric Schmidt’s remarks at the Select Committee’s hearing, “Leveling the Playing Field,” “it’s never too late to stop digging our own grave.”

Third, the United States must invest in technological leadership and build collective economic resilience in concert with its allies. The best defense against the CCP’s predatory economic practices will fail if not paired with a proactive strategy to invest in America and increase economic and technological collaboration with likeminded partners. The United States must bolster its unique advantages in technological development by funding research, incentivizing innovation, and attracting global talent in critical areas. In addition, the United States needs to invest in workers, who must remain competitive for jobs of the future, including by helping workers acquire skills-based training and adapt to technological transitions.

Consecutive U.S. presidential administrations have sounded the alarm on growing U.S. dependence on the PRC for critical goods, including rare earth minerals, components and chemicals used in U.S. weapon systems, and pharmaceutical products and precursors. The PRC has already demonstrated its willingness to weaponize these dependencies to coerce the United States and its allies and seek to constrain our policy options. The PRC’s growing leadership in key critical and emerging technologies vital to long-term competitiveness heightens the risks. 

The strategy presented here includes sets of findings and recommendations for each pillar. Taken together, they would level the economic playing field, reduce the PRC’s hold on U.S. and allied critical supply chains, and invest in a future of continued economic and technological leadership for the United States and its likeminded allies and partners.

To read the full committee report, click here

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Introduction

Since 2018, the United States and China have been embroiled in a trade war. The trade war stems from US President Donald Trump’s decision to impose tariffs on several products and commodities imported from China. In response to the policy, China also imposed tariffs on several products and commodities imported from the US. Research conducted by Chad P. Bown (2022) from the Peterson Institute forInternational Economics shows that as of July 2018, the average US tariff on imports from China was still 3.8%. However, tariffs on imports from China gradually increased until they peaked at 21% in September 2019 and then dropped to 19.3% in February 2020.

Meanwhile, on the Chinese side, in July 2018, the average tariff on imports from the US was at 7.8% and then gradually increased to 21.8% in September 2019. As of February 2020, Chinese tariffs on imports from the US decreased to 21.3% and reached a low of 21.2% on July 2020. Furthermore, based on the impact of tariffs on the percentage of trade, around 66.4% of US imports from China and 58.3% of Chinese imports from the US in June 2022 are still affected by tariffs set against each other.

There are efforts between the US and China to defuse the trade war through the Phase One agreement, which was agreed upon in December 2019. The two countries agreed on structural reforms to China’s economic and trade regime, particularly in intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. In the deal, China also committed to increasing the imports of goods and services from the US. Furthermore, a dispute resolution system was established with immediate and effective implementation and enforcement. Finally, the US agreed to modify Section 301 of the Trade Act of 1974. Despite these efforts, as shown from the data in the previous paragraph, the tariffs that the US and China imposed on each other remained relatively high.

The US put several Chinese companies on the Entity List as the trade war escalated between the two countries. The US Bureau of Industry and Security (2022) reported on August 23rd, 2022, that about 600 Chinese companies were already included on the list, with 110 companies included during President Joe Biden’s tenure. In practice, companies on the Entity List will have restrictions on access to commodities, software, and technology from the US. However, US entities may export, re-export, and transfer such matters to companies on the Entity List with a license from the US Bureau of Industry and Security.

The conflict between the US and China is not limited to political economy issues but also security politics. China’s claim to much of the South China Sea, known as the nine-dashed line, is contrary to the principles of the US freedom of navigation. This situation leads to freedom of navigation operations (FONOPS) by the US Navy in those waters that China regards as part of its territories as opposed to its claims. The existence of Taiwan also creates issues between the two countries. Although since 1972, it has recognized the communists in Beijing as the sole representative of China, the US maintains its ties with nationalists in Taipei and ensures their independence from Beijing. China’s growing economic and military power over the past two decades allows the country to become increasingly assertive of Taiwan. This raises tensions with the US as Taiwan’s ally and security guarantor.

The conflict between the US and China prompted the two countries to reduce their dependence on each other. US manufacturing imports from China have decreased, while Asian countries categorized as low-cost countries, have increased. At the same time, the issue of reshoring US companies’ operations in China arose. A survey conducted by A.T. Kearney (2022) found that about 47% of executives of US manufacturing companies operating in China have moved part of their operations back to the US in the past three years. 29% said they would restore parts of their operations in the next three years, and 16%said they had considered reshoring but are yet to make a decision. In the survey, US company executives also outlined that their options also include Mexico, Canada, and Central American countries (nearshoring), not limited to reshoring to the US. This decision coincides with the trend of automation by US companies; instead of looking for cheap labor, they are replacing them with robots. The process creates challenges for countries that host part of US companies’ operations characterized by the labor-intensive and technology-laden process.

From the Chinese side, the disruption caused by the conflict with the US encourages them to become more economically self-sufficient. Such efforts to achieve self-sufficiency are made through the dual circulation model, which includes changing the growth model from export-based to domestic consumption and reducing dependence on imports. Concerning the second element, according to the Economist Intelligence Unit (2020), China focuses on three sectors. First, technology with a priority towards semiconductors. China provides fiscal incentives and subsidies, and encourages cooperation between industries and universities to reduce dependence on US semiconductor companies or companies from other countries that use US technology. China also provides fiscal incentives and subsidies, and encourages cooperation between industries and universities. The second sector is energy. China does not rely on the US or its allies for energy supplies, however, shipping oil and gas by sea is vulnerable to a blockade or interception. The threat of a blockade prompted China to increase its renewable energy sector investment. The third sector is food. China’s agricultural sector is labor-intensive, but they experience labor shortage and are dependent on imports of seed and technology. This limitation prompted a policy of agriculture modernization from labor-intensive to technology-intensive.

Alfin Febrian Basundorois a graduate student at the Strategic and Defence Studies Centre, Australian National University, Canberra, Australia.

Muhammad Irsyad Abraris a graduate student at the Department of International Relations, Universitas Gadjah Mada (UGM), Yogyakarta, Indonesia.

Trystantois an undergraduate student of international relations at Universitas Gadjah Mada (UGM), Yogyakarta, Indonesia.

To read the abstract as it was originally posted by the Journal of World Trade Studies, click here.

To read the full research article, click here.

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