Trump’s ‘America first’ policies have sought to maximize the value the US extracts from its trade and investment counterparties. So far, most other economies have sought to minimize disruption by conceding ground to the US. However, circumventing the US will become increasingly attractive if US demands become more extreme.
At the core of President Trump’s shock to global economic governance are his policies on trade and investment. Against expectations, and contrary to what happened in his first presidency, he has largely done what he said he would do in the 2024 election campaign. This reflects planning ahead of the election by conservative thinkers.
Scarcely a week after taking office, Trump announced an initial set of tariffs against Canada, Mexico and China on 1 February 2025. The administration sought to justify the measures on national security grounds, citing concerns about illegal immigration and cross-border flows of the opioid fentanyl. The initial tariff hike was followed by numerous policy twists and turns, as the administration first raised tariffs against selected groups of countries, then paused the tariff hikes temporarily, and then either reached settlements or reimposed tariffs.
Several domestic legislative powers were used to authorize tariffs. The administration’s preferred approach was to invoke the International Emergency Economic Powers Act (IEEPA); this was the basis for the so-called ‘reciprocal tariffs’ imposed on all US imports on 2 April 2025. The net result was an almost sevenfold increase in the US average effective tariff rate, from 2.4 per cent at the start of 2025 to 16 per cent (the highest average rate since 1936) as of 20 February 2026. At this point the US Supreme Court intervened, ruling that the tariffs imposed through the IEEPA were illegal. However, the president quickly used another piece of legislation – Section 122 of the Trade Act of 1974 – to impose a 10 per cent across-the-board tariff for 150 days (albeit with a number of exemptions). As of 8 April 2026, the US average effective tariff rate stood at 11.8 per cent, its highest since the early 1940s. After allowing for substitution effects (i.e. the way consumers and businesses can be expected to shift purchases in response to tariffs) and other scheduled changes, the rate is projected to fall to 8.2 per cent by the end of the year. This is still a very substantial increase on the level that prevailed ahead of Trump’s second term.
The Supreme Court ruling was a significant setback for the president, as it reduces his scope to impose unlimited tariffs on individual countries indefinitely and with minimal explanation. It has also put in question some of the 20 or so economic agreements that President Trump had negotiated with various trading partners following the imposition of reciprocal tariffs. This is partly because the president’s imposition of Section 122 tariffs has broken the terms of a number of these agreements, and partly because the ruling on use of the IEEPA weakens the president’s ability to enforce the agreements – at least in the short term. A further setback is that the administration must repay illegally collected IEEPA tariffs to companies that paid them and that subsequently register a claim. The total value of refunds could reach $166 billion, depending on how many companies file claims.
However, the ruling is unlikely to change the president’s intent: namely, to use access to the US market to extract economic, financial and political concessions from trading partners (see Section 2.1). And there are at least four other legislative powers that he can use as a basis for imposing tariffs. These laws are not necessarily as flexible or quick as the IEEPA, but given time, it seems likely that the administration will be able to fine-tune them. Such powers may also ultimately be more legally durable than the IEEPA, particularly in circumstances where the president’s supporters have a majority in Congress. In addition, Trump has many other non-tariff sources of economic leverage, such as the ability to restrict access to the US dollar clearing system, or other countries’ dependence on the US for defence. The possibility these levers will be deployed is likely to deter several advanced-economy trading partners that have already signed asymmetric trade and investment deals with the US from quickly trying to unpick these arrangements. The European Parliament initially suspended ratification of the EU’s mid-2025 trade deal with the US, but subsequently allowed it to go through after adding a wide range of conditions under which the EU will no longer have to keep its commitments if the US fails to uphold its side of the agreement.
Another key feature of the US tariff strategy launched at the start of 2025 has been the enormous complexity that has resulted together with day-to-day uncertainty about what tariff rates will be applied to what products, over what period and for what reason.
Aside from the size of the increase in tariff rates, another key feature of the US tariff strategy launched at the start of 2025 has been the enormous complexity that has resulted together with day-to-day uncertainty about what tariff rates will be applied to what products, over what period and for what reason. This reflects the US president’s direct oversight of the strategy, resulting in a highly idiosyncratic approach and a wide and expanding range of motivations for applying tariffs.
2.1 The rationale for Trump’s new trade policy
So far, at least five different motivations can be identified.
The first is to force other countries to reduce their own tariffs and non-tariff protection measures vis-à-vis the US, while the US itself maintains its existing protections against other countries’ exports. In addition, the US administration has made clear that it will define for itself what constitutes foreign protection, rather than relying on independent arbitration or court rulings. As a result, tax and regulation policies that affect US companies operating in overseas markets may be defined as discriminatory simply because US companies lobby against them, or appear to be disproportionately affected, or because there is no parallel regulation in the US domestic market.
From the Trump administration’s point of view, the metrics of success for this strand of trade policy appear to be the size of the overall US current-account and trade deficits, and the size of the US’s bilateral deficits in trade in goods with individual trade partners. The latter yardstick was at the core of the ‘reciprocal tariffs’ formula implemented using the IEEPA. But this approach takes no account of the complex underlying economic mechanism through which changes in the US current account as a result of the imposition of tariffs will ultimately be determined by the US savings and investment imbalance. The administration’s reciprocal-tariffs policy also ignores trade in services, where the US has a large and growing surplus with the rest of the world. Nor does it take account of the principle of comparative advantage.
The second goal is to bring about more job-creating investment by US and foreign companies in America. This is partly intended to result from the tariffs eventually imposed – making it more expensive to serve the US market from abroad. The administration is also seeking specific investment commitments from foreign governments in return for allowing some continued access to the US market. It is unclear what such commitments will mean in practice, particularly in the case of market economies where most investment is in the hands of private firms and individuals rather than governments. Nonetheless, Japan has agreed to finance a $550 billion fund, largely controlled by the US government, which will invest in US strategic industries; the fund is capped at $20 billion a year, with any profits mainly set to go to the US government. South Korea has agreed a $350 billion fund. Taking a slightly different approach, the Swiss government has coordinated a set of pledges by private Swiss companies on investing in the US.
The third motivation, boosting US economic security, has been cited as an additional rationale for reducing the overall current-account and trade deficits. It is also being used to justify continuing with the Biden policy of 100 per cent tariffs on Chinese electric vehicles (EVs), effectively closing the US market to this source of supply. Economic security is the purported justification for protections for the US steel and aluminium industries, for provisions in new bilateral trade agreements designed to deter trading partners from deepening trade and investment links with China, and for bilateral deals to lock in supplies of critical minerals. The economic security justification for tariffs has been applied almost as freely vis-à-vis the US’s close allies as to the US’s strategic competitors.
The fourth motivation has been to raise additional revenue for the federal government, in part to offset the extension of tax cuts and other measures in the ‘One Big Beautiful Bill’ (OBBB) Act. As has become increasingly clear, this is an essential element of the tariff strategy. So while Trump is willing to negotiate, in return for concessions, some reductions in the high tariffs he originally imposed, there is likely to be an irreducible minimum (probably a headline rate of 10 per cent) below which he will not go. Before the Supreme Court’s IEEPA ruling, estimates suggested that the tariffs imposed up to that point under different legal powers would raise a net $2.35 trillion in additional revenue over the period 2026–35 (taking account of the gross revenue raised and the offsetting reductions in tax receipts elsewhere due to growth and income effects, etc.). This estimate was reduced to $1.0 trillion as a result of the court ruling, but would rise again to $1.6 trillion if the temporary tariffs imposed under Section 122 could be made permanent. However, under any scenario, this would amount to less than half the $5 trillion total cost of the OBBB Act.
The fifth motivation is to achieve a diverse range of foreign and domestic policy objectives. For example, in August 2025 Trump imposed an additional 25 per cent tariff on Indian goods exports to the US (bringing the overall tariff rate to 50 per cent) as retaliation for Indian purchases of Russian oil. He also imposed an additional 40 per cent tariff on Brazil (again, bringing the overall rate to 50 per cent) with the apparent goal of forcing the Brazilian authorities to release Brazil’s former president, Jair Bolsonaro, following the latter’s conviction for his role in an attempted coup. In January 2026, Trump threated to impose an additional 10 per cent in tariffs on eight European countries as part of his campaign to force Denmark to sell Greenland to the US. This motivation for using tariffs is potentially the one most greatly restricted by the Supreme Court ruling, as it depends on Trump being able to act quickly and in a targeted way with minimal evidence. Since the ruling, he has rarely deployed tariff threats in this way. However, it remains to be seen whether the approach will re-emerge once the administration has completed development of its replacement regime for the IEEPA.
2.2 Key features of Trump’s strategy
Detailing these motivations highlights several central features in Trump’s trade strategy that make the policy very hard for other countries to respond to systematically in the short term. However, if key elements of this strategy are sustained, the US will increasingly become an unattractive market to serve despite its size.
The most important problems are the invalid arguments and inconsistent theories underpinning a number of Trump policies. This chapter has already described the serious flaws in the original reciprocal-tariffs formula. Another example is the inconsistency between seeking to reduce the US trade deficit, and hence the current-account deficit, and trying to boost capital inflows in the form of foreign direct investment (FDI) into the US economy. There is also a contradiction in using tariffs and trade negotiations to force foreign companies to switch investment from overseas locations to the US while claiming to want to strengthen the US economy. The facilities companies construct under such pressure are likely to be less productive than those they would have built overseas; this in turn will damage other US industries that, as a result of tariffs, have to rely on these new facilities for inputs. Furthermore, the new tariffs will discourage imports of products (such as footwear) that US workers may generally be too highly paid and skilled to make, and of products (such as some advanced computer chips) that the US workforce lacks the skills and operational culture to make successfully. Either way, workers will be diverted from areas where they are more productive to areas where they are less productive.
A further problem is the way the strategy has so far been completely unconstrained either by WTO rules or by obligations under the US’s 20 bilateral or minilateral free-trade treaties that pre-date the current administration. Even the United States–Mexico–Canada Agreement (USMCA), which Trump signed in his first term, is not immune. After initially imposing tariffs in violation of the agreement, the administration restructured tariffs on Mexico and Canada to comply with the USMCA, including exempting the 85 per cent of goods imports that meet the agreement’s origin and documentation requirements. However, in January 2026 the president threated to impose 100 per cent tariffs on Canada if it signed a trade deal with China. Indeed, the president appears willing to reopen any trade agreement at any point even though partner countries may believe they have settled all outstanding issues. He also appears to attach very little weight to the costs incurred by domestic or foreign business in dealing with constantly changing tariff levels.
These challenges are reinforced by the fact that many of the purported ‘deals’ that have been signed were initially sketchy and vague. The administration has chosen not to implement them in US law, and partner countries have often found them hard to implement. For example, the UK–US trade deal signed in May 2025 ostensibly removed Section 232 tariffs on UK exports of steel and aluminium products. But a recent US announcement on Section 232 leaves substantial tariffs of 25 per cent on UK metal imports in place. The US also suspended talks on implementing a related technology investment agreement because of UK reluctance to make additional concessions on market access for US food exports. Meanwhile, the EU’s bilateral deal with the US, announced in July 2025, included a clause capping future US tariffs on European pharmaceutical products at 15 per cent (including any that might arise from the ongoing Section 232 investigation). However, subsequent statements by the Trump administration raised questions about whether there could yet be additional tariffs as a result of the Section 232 investigation. In addition, at the end of April 2026 Trump threatened to impose 25 per cent tariffs on imports of EU cars and trucks by July 2026 (up from the agreed 15 per cent), claiming that the EU had been slow to implement other aspects of the July 2025 deal.
Faced with the possibility of further tariff hikes on goods, other countries may begin to consider service sectors as an attractive target for retaliation.
The fact that Trump’s trade strategy has so far focused almost entirely on trade in goods and has largely ignored trade in services probably reflects the very large overall surplus that the US currently enjoys in services trade, alongside the political priority Trump sees in expanding what the administration might consider ‘high-quality’ manufacturing jobs. But there is no guarantee that this situation will continue. Faced with the possibility of further tariff hikes on goods, other countries may begin to consider service sectors as an attractive target for retaliation. Equally, Trump has strongly criticized digital services taxes and sustainability disclosure requirements as discriminating against US companies. This is despite the fact that these measures are applied equally to all companies and go to the heart of domestic policy sovereignty. The EU agreed to withdraw proposals for an EU-wide digital services tax in parallel with its July 2025 trade deal. But this may only prove to be a temporary truce.
A further concerning aspect of the Trump trade strategy is the way the administration has struck deals with individual US technology companies, entitling the US government to share revenues from private sector chip sales to China as a condition for allowing the companies concerned to continue exporting. The first such deal permitted some US technology companies to sell relatively basic AI chips to China in return for handing over 15 per cent of the revenue to the US government. A second deal, with NVIDIA alone and following intense lobbying by Jensen Huang, NVIDIA’s CEO, allowed the company to sell a more advanced chip (though not the most advanced available). Undertaken against the advice of US national security experts, this arrangement gave the US government a 25 per cent share of revenues. It remains to be seen whether the Chinese government will grant import licences for the chips in question, and how much demand there will be given increased competition from Chinese producers. However, these arrangements highlight a broad shift from the use of relatively straightforward, criteria-based trade restrictions, imposed on grounds of national security, to a highly selective approach in which the ability to export and the incidence of export taxes are not only country- or sector-specific but may be targeted to benefit or punish individual US or foreign companies.
2.3 The responses of other countries
Although the US share of world trade is only 14 per cent (compared to a share of more than 25 per cent of global GDP), the administration proved very effective in 2025 at leveraging access to the US market to force other countries to make asymmetric policy concessions.
This partly reflected the attractiveness of the US domestic market (integrated, wealthy and open to consumption of foreign goods), and the fact that trade is generally less important to the US economy than to the economies of many of America’s trading partners. It also reflected the speed with which the president was able to act due to the flexibility of the IEEPA legislation (now ruled illegal) and his willingness to ignore the US’s existing bilateral and multilateral treaty obligations.
In addition, the US administration combined leverage linked to the size of its market with other forms of leverage, notably the dependence of many trading partners on the US for security guarantees.
While a coordinated response at the outset, including the threat of retaliation, from all of the US’s main trading partners might in theory have forced a change of policy, this was not a practical possibility. This was because, in the absence of the US itself, no country was willing to take on a leadership role. There are also major differences between countries in terms of domestic market size (and hence potential leverage on the US), dependence on trade with the US, the extent of US respect for existing trade agreements, and dependence on the US for security guarantees. A coordinated response would also have meant forming a de facto alliance with China, which many countries would have seen as unpalatable (given China’s own use of economic coercion and breaches of international trade norms over past years). In these circumstances, it is not surprising that the US’s trading partners responded individually rather than collectively to Trump’s tariff threats.
Only two economic actors, the EU and China, were big enough to retaliate unilaterally against US tariffs with a plausible chance of forcing the US to back down. In 2024 the EU was the US’s largest trading partner, with bilateral trade in goods and services estimated at $1.5 trillion; China was the US’s fourth largest trading partner (if the EU is treated as a single trade counterparty), with total bilateral trade of nearly $661 billion.
The EU appeared initially to be on a course of retaliation, with the European Commission preparing a series of merchandise trade retaliation measures in response to President Trump’s announcements. The EU also considered retaliating on trade in services (where the US enjoys a substantial bilateral surplus) and deploying the EU’s anti-coercion instrument, which grants wide-ranging powers to impose restrictions on trade, finance and investment.
However, in the event, the EU decided not to take the retaliation route and settled in July 2025 for an asymmetric negotiated outcome, the terms of which allowed the US to impose a 15 per cent tariff on most imports of EU goods (some goods designated as ‘strategic’ were kept at zero tariffs; in contrast, the tariff rates for steel, aluminium and copper were set at 50 per cent). At the same time, the EU committed to eliminate all existing tariffs on US industrial goods imports, granted preferential access to some agricultural commodities, and agreed to making substantial US investments and purchases of energy from the US.
The EU’s decision was deeply unpopular at home, and the EU’s leadership was criticized for mishandling the response – including for delaying retaliation at the outset of the trade conflict. However, it is now widely perceived that the EU decided to prioritize its security interests and in particular the goal of maintaining US support for Ukraine in the latter’s conflict with Russia. European leaders visited Trump in August 2025 to shore up support for Ukraine’s president, Volodymyr Zelenskyy, after Trump’s meeting with the Russian president, Vladimir Putin. It is likely the European meeting with Trump would have gone much less well if the EU–US trade negotiation had been unresolved. A further goal, also largely achieved by the July agreement, was to preserve the EU’s freedom of action in domestic economic policy.
Other advanced economies, including Japan, South Korea and the UK, have broadly adopted a similar approach to that of the EU, in so far as they have agreed to asymmetric trade deals with the US. On the surface, the goal has been to maintain access to the US market, but maintaining US security guarantees and cooperation has probably been a decisive factor in all cases.
By contrast with the advanced economies, and in line with its approach during Trump’s first presidency, China moved quickly to retaliate against US tariffs. China imposed its own tariffs on imports of US goods in response to Trump’s initial February 2025 measures, and raised trade barriers further in response to escalation by the US. The retaliatory tit for tat got to a point where, in April 2005, US tariffs on China (at 145 per cent) and Chinese tariffs on the US (at 125 per cent) would have been sufficient, if sustained, to end virtually all merchandise trade between the two countries. After pauses, rollbacks and re-escalations, China further strengthened its restrictions on US access to critical minerals in October 2025. This was followed by a meeting between Trump and China’s president, Xi Jinping, on 30 October, the outcome of which was effectively a one-year truce. China agreed to roll back many of its restrictions on US access to critical minerals, while Trump eased tariffs on Chinese goods. Before the Supreme Court ruling in February 2026, the average US tariff rate on Chinese goods stood at 47 per cent, while the average Chinese tariff rate on US goods was 32 per cent. However, there were many exceptions qualifying this picture.
The most important factor explaining the difference between the EU and Chinese approaches to Trump’s tariffs is the fact that China does not rely on the US for security guarantees. Indeed, given the strategic competition between China and the US, the authorities in Beijing may have been concerned that any sign of weakness in responding to US trade actions would have been exploited by the Trump administration in other areas. Other factors underpinning the Chinese response are likely to have included the Chinese authorities’ greater willingness to accept the economic costs of retaliation (despite weakness in China’s domestic economy) and the current highly competitive position of Chinese manufacturing industry, which could allow the country to continue exporting profitably to the US despite historically high tariffs. China may also have believed that it could reroute significant volumes of trade to the US via third countries, although this tactic could prove more difficult than in the past given the way the US is framing trade agreements with countries such as Vietnam and Mexico.
Most countries have maintained their trading relationships with partners other than the US on WTO terms as far as possible.
Alongside the immediate negotiations with the Trump administration, other countries have gradually begun to develop a broader strategy for dealing with the US assault on global trade norms. So far, this strategy has three main elements:
First, most countries have maintained their trading relationships with partners other than the US on WTO terms as far as possible. The WTO has estimated that 72 per cent of world trade continues to be on WTO-consistent terms (albeit down from 80 per cent in 2024). At the same time, world merchandise trade grew by a remarkable 4.6 per cent in 2025, despite the Trump tariff shock, as the result of very strong growth in trade of AI-related investment goods. Services trade, which to date has not faced restrictions, also grew by 5.3 per cent.
Second, many countries or blocs have pushed harder to conclude free-trade agreements (FTAs) with partners other than the US. Such agreements can play a crucial role in maintaining trade stability in the face of possible spillovers from changes in US tariff rates. But FTAs are also a way to diversify trade away from the US over the long term. The substantial concessions agreed by both parties in some recent agreements indicate the urgency with which this goal is now being pursued.
The EU has led the way with two major agreements. The first is the EU–Mercosur Free Trade Agreement, which could add an estimated €80 billion to EU GDP (the FTA was signed in December 2024 and adopted by the European Council under qualified majority voting in January 2026, although it has been referred to the European Court of Justice by the European Parliament). The second is the EU–India FTA, signed in January 2026, which removes or reduces tariffs on 90 per cent of goods traded between India and the EU; the FTA is expected to double EU exports to India by 2032. Other important EU agreements include a new Comprehensive Economic Partnership Agreement (CEPA) with Indonesia, and a wide-ranging agreement with the UK to enhance the existing post-Brexit Trade and Cooperation Agreement in areas such as emissions trading, sanitary and phytosanitary measures, fisheries and youth mobility. The EU has also stepped up its efforts to modernize existing agreements with Mexico and Chile, and to achieve an FTA with the United Arab Emirates (UAE) and possibly the Gulf Cooperation Council (GCC).
Other economies are also pursing major non-US FTAs. The UK and India signed a bilateral FTA in July 2025, while Canada has announced its intention to double its non-US exports over 10 years. There are indications of broader efforts to shore up the international trading system, or at least the principle of open markets for trade and investment. These include the EU’s proposal for deeper cooperation with – although not membership of – the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a 12-country grouping; and the announcement in May 2025 by New Zealand, Singapore, Switzerland and the UAE of a new partnership among smaller trading nations to promote trade, investment and open markets. As many commentators expected, the WTO Ministerial Conference on 26–29 March 2026 failed to achieve any breakthroughs on the reform agenda, and the WTO continues to be disparaged by the US. However, the WTO remains a key forum for most countries’ efforts to shore up the multilateral trading system.
Third, there has been a renewed focus within some larger federal countries and trade blocs on removing internal trade and investment barriers. Canada has announced the removal of all federal obstacles to trade between its provinces, while the EU has doubled down on efforts to create a genuine single market in savings and investments as well as in energy. India appears to be using the pressure from external trade agreements to remove internal barriers. This follows the template China adopted during its process of accession to the WTO in the late 1990s and early 2000s. The economic benefits from internal market reforms are typically estimated to be far greater than the losses likely to be incurred as a result of restricted access to the US market.
These moves to shore up international trade rules, diversify trade and deepen domestic markets in response to the Trump trade shock may prove significant in the longer term. Indeed, they could lead, in theory, to the emergence of a relatively open economic space occupying the area surrounding the US, in which the free flow of trade and investment is largely preserved. But so far, at least, such initiatives appear fragile, uncoordinated and largely piecemeal. They are therefore vulnerable to being derailed by further actions by the US or possibly China.
Three questions will be critical in determining how the global trade and investment regime will evolve:
First, will the trade and investment deals negotiated by the US in 2025 stick? Or will they gradually come undone? Counterparty governments may face growing public opposition to unequal agreements (as has already happened in relation to the investment commitments made by Japan and South Korea), or may gain sufficient time to develop economic and security policies that reduce dependence on the US. Alternatively, the US Supreme Court’s IEEPA ruling may empower other governments to unpick the deals, particularly if Trump’s search for an alternative legislative basis for his tariff policy leads the US to impose tariff rates that are higher than those previously negotiated with counterparties. If the Republican Party loses control of Congress at the mid-term elections in November 2026, this may further undermine Trump’s ability to use tariffs and military threats to exert pressure.
Second, will Trump overreach in his demands or lose negotiating traction in other ways? In response to certain US demands, trading partners may conclude that the price being demanded for access to the US domestic market is simply not worth it. The more extreme the demands of the US, and the longer other countries or blocs have had to prepare for the economic consequences of a collapse in their trade with the US, the more likely an outright rejection of US demands becomes.
Possible future scenarios that might trigger this sort of reaction by US trading partners include the US demanding that the EU cede the right to regulate and tax US tech companies operating withing the EU; the US demanding that Canada forgo its aim of negotiating a trade and investment agreement with China; or the US pressuring Denmark, under the threat of tariffs, to sell some or all of its sovereign territory in Greenland to the US. Similarly, if Trump carries out his threat to attack a NATO ally by occupying Greenland by force, it is impossible to see how the NATO alliance could continue, as the very protections it purports to offer would be meaningless. The US has taken a considerable hit to its credibility following its attack on Iran, including as a result of the administration’s failure to consult Congress or foreign partners, the failure of the war to achieve many of the president’s initially stated objectives, and the growing likelihood that the US will end the conflict having made the economic and political situation considerably worse for its allies in the Gulf, Europe and Asia. This will inevitably affect the way other countries respond to US demands around trade and investment in future.
Third, will other countries or trade blocs follow the US and Chinese tracks? This would mean, for example, responding to internal and external pressures by subsidizing and protecting domestic industries, taking unilateral action to secure critical minerals and deploying tools for economic coercion. This is most critical in relation to the EU. Given its weight in global trade, it is hard to see how a significant degree of openness could be maintained globally if the EU chose to follow a mix of the US and Chinese approaches.
