Why Trump blinked, and why the US tariff assault now seems targeted exclusively on China

Spare a thought for US Trade Representative Jamieson Greer, who was midway through a stoic defence of Wasington’s reciprocal tariffs in the US Congress, when news of President Trump unexpectedly announcing a 90-day reciprocal tariff pause for most countries broke via a social media post.

The post sparked off a war of words between US Representative Steven Horsford, a Democrat from Nevada, and America’s top trade representative Greer. Rep Horsford tore into Greer on the House floor, chiding him over the fact that he was ostensibly unaware of what was about to unfold and saying that his boss had “pulled the rug under his feet” even as he sat there defending the indefensible.

Ironically, this 90-day pause is precisely what a White House representative had alluded to a couple of days ago, sending markets soaring momentarily, before it being promptly dismissed by the Trump administration as “fake news”.

So, Trump has paused tariffs on most nations for 90 days, including India, while raising tax on Chinese imports to 125 per cent. US Treasury Secretary Scott Bessent named India as among those willing to ‘sit at the table rather than escalate’. This came amid a global market resurgence after a week-long meltdown, mostly out of relief as Trump attempted to narrow what had become an unprecedented trade war between the US and most of the world to now a showdown between the US and China. This is what the whole thing always was about, perhaps.

Why the baseline tariffs will stay

What has now been removed by the US is the varying country-by-country reciprocal tariffs that Trump had imposed last Wednesday. The 10 per cent tariff was the baseline rate for most nations that went into effect earlier. This is still in place, and likely to stay on. There is some logic to that, in what has otherwise been a largely illogical exercise.

The objectives of all these tariffs, as stated by Washington over a period of less than a month, have been shifting: starting with national security concerns (fentanyl and immigrant inflows), to the tweaked narrative of the need to balance trade deficits, and putting a stop to America being “shortchanged” by trading partners.

But there is another, slightly more cogent reason in that mix: that the tariffs will bring in the money for the proposed tax cut expected to be renewed by the Trump administration later this year. The baseline tariffs are expected to essentially fund these tax cuts, and so will likely continue.

The point behind Trump’s tariff assault

According to a New Delhi-based analyst close to the government, Trump is clearly not worried about global imbalances, or the sustainability of the global economic order. He thinks of trade balances like business deals. The country with a trade surplus is the winner.

For a man who has generally been fickle with his views, tariffs are an issue where Trump has been uncharacteristically consistent. In 1987, long before he voiced any intention to run for public office, Trump took out a full-page newspaper ad warning that Japan was “taking advantage” of the US, while pointing to the massive trade deficit between the two countries. Like most things with Trump, this was essentially a personal issue, which likely stemmed from the fact that the real estate developer had, just a few days prior to these ads, lost out on a bid for a grand piano in New York to the representative of a Japanese trading house. His views on tariffs have endured through these years, even though there is very little economic logic to the imposition of large-scale tariffs by a country like America.

Trump has also surrounded himself with a cabal of mercantilist economists like Peter Navarro, the author of ‘Crouching Tiger: Will There Be War with China?’, in his second term, who really believe that deficits are a bad thing. They have played a role in reinforcing Trump’s original views. So while conceding that Trump’s long-held view is perhaps the wrong way to think about mercantile deficits, his crude trade policies, the analyst quoted above said, may be the only thing that spurs change in global trade imbalances. There is no way that China or Germany, for instance, would ever voluntarily refrain from running export surpluses.

These countries, which like Trump’s Washington, define their economic models in terms of trade balances, may only be more sophisticated in their defence of it. Trump’s approach is to take a political sledgehammer to force countries such as China to change, the analyst pointed out.

China, how it trades and does business

There is a sense in Washington DC that China has gotten away with low cost manufacturing for too long. No other country has had the same level of global dominance across product categories since the early 1970s. This is more significant now than in earlier decades, when trade represented a much lower share of global goods production and consumption. For instance, the global trade-to-GDP ratio in 1970 was around 25 per cent, but by 2022, that climbed to over 60 per cent. Weakening domestic demand, alongside export-facilitating policies in products, where China is the world’s dominant manufacturer, has led to prices collapsing globally and driving other national producers out of business.

While the benefit of this has been a phase of sustained lower global inflation, China has simultaneously created a progressive stranglehold over global manufacturing: a level of manufacturing dominance by a single country seen only twice before in world history — by the UK at the start of the Industrial Revolution, and by the US just after the second World War, according to research by the Rhodium Group and from views flagged by Noah Smith’s ‘Manufacturing is a war now’ piece.

What makes China’s extraordinary dominance in manufacturing worse is the continuing weakness in domestic demand in China. That too comes from the problem of China’s unwillingness to vacate its earlier specialisation in low value-added manufactured products as it moved up the global value chain. This has concomitantly led to a weakness in Chinese demand for imported goods, which was expected to rise if China had ceded the manufacture of low value-added manufactured goods as it progressively moved up the value chain. So, more than Beijing’s export competitiveness, weak Chinese imports explain this continuing imbalance. Trump has ostensibly set out to address this imbalance. So, while many might not agree with Trump’s solution, it’s difficult to wish away the problem he’s wants to fix.

So, in that sense, Trump’s tariff action has come full circle, back to the originally intended target – China. Trump had been waiting for a call from President Xi Jinping to discuss what can be done on tariffs and secondary issues such as the fate of Tik Tok. That phone call never came, even though sources attest to backchannel negotiations at lower levels.

The structural issues with the American economy

The US economy relies heavily on trade, and that’s part of its structural construct in the post World War-II era. This is because the American economy consumes more goods than it produces domestically. As a result, its imports are almost always higher than its exports, resulting in a trade deficit.

Why is that so? When a country consumes more goods than it produces domestically, it needs to source the additional goods from other countries through imports. And that is resulting in a high trade deficit — the gap between what it buys from other countries and what it sells to them.

In that context, high tariffs are a self goal for the US, coming at the time they did. The American economy was actually growing more than its potential growth of about 2 per cent, unemployment was really low and inflation was coming down to levels where the US Federal Reserve would have gone on to reduce rates further. Tariffs have ended up spoiling this soft landing achieved by policymakers in the US, which seemed implausible a while ago.

The impact of even these 10 per cent tariffs is that prices go up sharply for the US consumer, who then curb spending. If the flip flop on tariff outlook continues, investors get jittery and the investment impetus slows due to these uncertainties. So aggregate growth in the US economy then slides, even as there is higher inflation and the Fed is not able to cut interest rates as much as it would have liked to. All of those things are bad for the American economy.

Even the 90-day pause is just that, a pause. Nobody knows what happens after that. Which only feeds into the uncertainties.