The hidden logic of Trump's tariffs
There seems to be no simple explanation for the chaotic implementation of import tariffs in the United States—targeting both allies and adversaries—under the administration of President Donald Trump. The United States is pursuing multiple, often contradictory, objectives. Given that structural trends drive the deindustrialization of advanced economies, the possibility of relocating factories seems remote. On the contrary, the most plausible objective is fiscal. The current US administration claims that tariffs can generate revenue, so that, in practice, foreign countries would be subsidizing tax cuts for American taxpayers.
Many Americans probably find this logic compelling. After all, what's so important about putting national interests first? But in fact, there are many problems with that approach. For starters, the US government ignores the likelihood—or rather, the near certainty—of retaliation. When trading partners respond in kind—which is often immediate—the gains from a unilateral tariff increase are diminished.
The Trump administration is banking on the country's economic power to preserve the advantages of this policy despite countermeasures from others. However, it appears that all of America's major trading partners have united against it. Negotiating with a small economy like Colombia is one thing, but facing retaliation from China, the European Union, and the partners in the United States-Mexico-Canada Agreement (USMCA) at the same time is quite another.
These dynamics highlight the very problem that multilateral trade agreements—first the General Agreement on Tariffs and Trade (GATT) and then its successor, the World Trade Organization (WTO)—were intended to address. As economists Kyle Bagwell and Robert W. Staiger demonstrated in an influential 1999 article, An economic theory of GATT, trade agreements exist to solve a classic prisoner's dilemma: large economies have incentives to impose unilateral tariffs to improve the terms under which they trade, but if all countries adopt the same attitude, the result is a race to the bottom in which everyone loses.
The principle of reciprocity and the most-favored-nation clause (not discriminating between trading partners) were institutionalized to prevent this scenario. These rules sustained a system that worked effectively for decades until it began to come under attack in the mid-2010s. Although the rejection of multilateralism had multiple causes, the intensification of the rivalry between the United States and China, coupled with the resurgence of geopolitical factors, played a role.
The post-war trading system was based on the assumption that countries, by nature, seek to maximize their own economic welfare. However, in recent years, US trade policy has increasingly been driven by a different motive: to hinder the economic rise of its competitors, especially China. This objective has taken precedence, even over the prosperity of American citizens themselves. Viewed through these lenses, Trump's tariff strategy seems more coherent. It may not benefit the US economy, but that's not the point. The purpose is to harm others.
This shift raises a fundamental question: in a world increasingly defined by geopolitical rivalry, is the current multilateral trading system obsolete? Surprisingly, one recent working paper suggests not. Unless the United States—or any other major economy—assigns a zero value to its own well-being, there remains a strong incentive to maintain international negotiation and cooperation. The specific outcomes of negotiations—such as the level of tariffs—may change, but the underlying logic of global economic coordination remains valid.
Even when countries are concerned not only with their absolute well-being but also with their relative position—a mindset that often leads to policies designed to harm their rivals—there is still a reason to negotiate. Countries are interested in seeking "Pareto improvements": outcomes that improve their own well-being without necessarily worsening the position of their competitors. This is precisely what multilateral agreements favor. Cooperation would only be meaningless if countries adopted Pyrrhic victory strategies, harming their rivals without regard for the cost to themselves.
While the logic of cooperation remains, the institutional framework underpinning global trade must adapt. The very working paper I mentioned suggests that we are witnessing a "breakdown" of the liberal trade order, a necessary readjustment that allows for renegotiations under new geopolitical realities. If this is the case, the current rising trade tensions could be seen as a painful but temporary transition to a revised multilateral framework that better reflects the evolving balance of power.
This interpretation leaves room for cautious optimism. If the transition is managed properly, it could lead to a renewed and politically viable global trading system. But there are also significant risks. Protectionism and economic nationalism, if left unchecked, will cause long-term damage. If trade policy becomes merely an instrument of geopolitical struggle, the space for cooperation could disappear altogether. History is full of unintended consequences. We must wait for today's leaders to understand what's at stake before it's too late.
Copyright Project Syndicate