Never mind that this rationale ignores the many benefits that the US has reaped from trade, not just cheaper goods and expanded consumer purchasing power, but also the foreign capital inflows that subsidise US interest rates and, in turn, help create financial wealth. Trump is fixated on the “carnage” of seemingly chronic trade deficits, especially the alleged hollowing out of America’s once-great manufacturing sector.
Be that as it may, the significance of going from an effective US tariff rate that averaged just 1.8% between 1995 and 2024 to a new floor of 10% cannot be overstated. True, this 8.2 percentage point hike is only slightly larger than the 6.3 percentage point increase in effective tariffs that occurred from 1929 to 1933, following the enactment of the infamous Smoot-Hawley Tariff Act of 1930. But a 10% baseline tariff would represent a 445% increase from the low-tariff regime of the past three decades, whereas, under Smoot-Hawley, tariffs rose a mere 47% from 1929 to 1933.
Moreover, this new baseline would be applied at a time when goods imports account for 12.2% of US GDP, almost three times their 4.3% share in 1929. In other words, there is nothing minimal about a new 10% tariff floor — it would represent a major shock to the US economy.
The second key component of Trump’s trade policy is the “China penalty.” Currently, Chinese imports are subject to a 30% tariff, triple the rate imposed on almost all other countries. Inasmuch as this premium is fentanyl-related, it could decline significantly if the US and China agree to restrict precursor chemicals.
See also: Market discipline will prevail in the US
But even in the event of a breakthrough on fentanyl, the Trump administration and Congress share strong agreement on the need to inflict a special penalty on China for what they see as its outsize contribution to America’s gaping foreign-trade deficit. This reflects the standard allegations of unfair trade practices, as well as heightened national-security concerns. That many of these claims are based on false narratives seems of little concern to policymakers in Washington, where being tough on China is now a rare point of bipartisan consensus.
Significantly, the twin pillars of Trump’s trade policy, a global minimum tariff and an additional China penalty, are likely to come as a package deal. The danger of this approach is greater than the sum of its parts.
Trade diversion
The main risk to the US economy is increased trade diversion away from China, a low-cost producer, to higher-cost countries. While this occurred after Trump first imposed tariffs on China in 2018-2019, it may have even more damaging effects now, as the president’s so-called One Big Beautiful Bill Act will likely increase the federal budget deficit, depressing domestic savings even further.
See also: Does Trump really want to sacrifice dollar dominance?
That would widen America’s multilateral trade deficit, with the bulk of the increase comprising more expensive imports, all of which have been hit with a fivefold increase in effective tariffs. Fixated on continuing to blame China for its outsize trade imbalance, the US will be incurring an even greater global penalty.
An added complication is that Trump’s trade policy will likely lead to America’s decoupling from China-centric supply chains. The deglobalisation caused by “friend-shoring” is likely to raise the costs of foreign production, assembly, and distribution, resulting in sharp price increases for US consumers. With growth under downward pressure and inflation risks shifting to the upside, the threat of US stagflation will only grow.
Direct hit for China
China’s experience will be the mirror image of America’s. Its export-led economy will take a direct hit from the tariffs imposed by its largest trading partner. Moreover, China faces the distinct possibility of renminbi appreciation, which would exacerbate its recent outbreak of deflation.
While the Chinese government will undoubtedly respond to these pressures by underscoring the need for consumer-led rebalancing, the odds of an immediate shift in consumption patterns are low. That will leave the Chinese economy increasingly dependent on exports rather than domestic demand, which in turn implies more investment in technology-intensive “new quality productive forces,” adding more fuel to a protectionist backlash in the US.
None of this is good news for a softening world economy that is already feeling the pressures of a tariff-induced slowdown in global trade. With China and the US together accounting for a little more than 40% of global GDP growth since 2010, the risk of a worldwide recession will only rise if Trump keeps pushing his unworkable trade formula. — © Project Syndicate, 2025
Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China (Yale University Press, 2014) and Accidental Conflict: America, China, and the Clash of False Narratives (Yale University Press, 2022)
