Trump’s Trade War: A Lose-Lose Grand Strategy
How Trump’s trade war hurt allies, missed reshoring, and left China stronger than before.
Welcome to our first Phase Reading, our monthly format where we explore a global trend in politics, technology, economy and society, or all of these together, when we want to follow the longer threads behind the news.
Today, we talk about Trump’s trade policy and the tariff chaos reshaping global trade and international relations. As one of the most relevant developments of the year, much has been written about it, making it difficult to form a clear picture. Here we reconstruct the thread of events, assess the current state of affairs, and explore the consequences. We will talk about:
Why the trade deal between the US and the EU, Japan and South Korea is a loss for both sides.
The true aim of the tariffs, or is there one?
Why the winner of the trade wars so far is China.
Why this matters
The redefinition of the global trade order is redrawing diplomatic alignments between the US and its allies, testing the cohesion of their military alliances. What is emerging is a shift from a rules-based order to a transactional system in which might makes right. These pressures are already influencing the domestic politics of America’s partners, with growing calls for a“Europe First” policy and welfare rollbacks in the name of competitiveness.
On 2 April 2025, Donald Trump announced Liberation Day, imposing sweeping tariffs on most countries on Earth1, which he described as a “declaration of economic independence”. The stock market thought otherwise and took a nosedive worse than during the Covid-19 pandemic, burning $5 trillion in two days. The bond market and the dollar followed suit, threatening a major financial crisis, and the White House rushed to correct course. On 9 April, tariffs were lowered to 10% for everybody until 9 July.
This was the first of a long series of delays, walk-backs, changes in tariff values, new tariffs and new walk-backs. So long, in fact, that stock and bond markets have grown accustomed to it and barely blip at every new Executive Order – or post on Truth social. It’s impossible and probably pointless to try to retrace every policy revision, but it does make sense to explore the effects of the biggest global trade upheaval since World War II. What are the consequences for major US allies, for the US itself, and its adversaries? What is the meaning of all these shakeouts? Is it as big a deal as it’s been regularly considered? Let’s make a deep dive into the most relevant developments of the Trump administration’s commercial policy.
“The EU was formed in order to screw the United States” – Trump’s view of trade
It’s fair to say that the trade deals with the EU, Japan, and South Korea are the most consequential developments in Trump’s second-term approach to trade. Trump himself hailed the deal with Japan as the “largest trade deal in history”, which was soon overtaken by the deal with the EU, “the biggest deal ever made”. All these deals originate from Trump’s desire to rebalance trade and cancel or at least reduce the large trade deficit the US has with the rest of the world. In Trump’s view, this amounts to the rest of the world “ripping the US over”. It’s not important whether a country is an ally, an adversary, or just another country. It is not even important if the claim is true. The trade deficit must be eliminated2.
Let’s quickly see how the US and its allies got to these deals. On Liberation Day, Trump imposed 25% tariffs on South Korea, 24% on Japan and 20% on the EU. On 9 April, he lowered the value to 10% until 9 July, a pause later extended to 1 August. Then, after the threat of increased tariffs (30 or 50%). In the last week of July, deals were struck with all three partners, along very similar lines:
Tariffs were set to 15% on all products – except for goods under different tariff regimes or exemptions.
Tariffs on US industrial goods are eliminated, and US agricultural products are given preferential market access or larger quotas.
The tariff reduction includes cars and parts, a sore point especially for Europe and Japan, but also for South Korea.
The EU, South Korea and Japan agreed to invest massively in the United States, in the order of several hundred billion, through 2028, respectively $600, $350 and $550, although with different provisions for the three partners.
The EU and South Korea commit to importing significant amounts of US liquefied natural gas (LNG) and other energy products, $750 billion and $100 billion in 3 years, respectively, for the EU and Korea, and $7 billion per year for Japan.
Increased purchase of US military equipment.
Other vague provisions on uniformising digital standards, safety requirements for cars, and intellectual property rights.
The EU’s, Japan’s and Korea’s angle
These agreements were widely considered a political and economic win for the Trump administration. The US protected its domestic sectors and even obtained several concessions from allies, who had to accept high tariffs across the board, agree to large investments in the United States and promise purchases of American energy products and military equipment. In return, Europe, Japan and South Korea secured very little beyond keeping the alliance with Washington afloat. We believe the reality of the deals is more nuanced, resembling more of a net loss for both sides, despite some painful aspects for the EU and Japan.
There’s no denying the reality of the tariffs. A 15% increase in the price of most products is obviously a hit to European, Korean, and Japanese businesses. Tariffs are especially serious for the automotive sector. For Japan, vehicles and parts are by far the largest export to the US, nearly one-third of the total value, worth $40 billion in 2024. The trade deal is predicted to “decimate Japan’s growth” The same is true for South Korea, with cars and parts worth nearly $38 billion in 2023, out of $118 billion of total exports to the US. In Europe, vehicle exports to the US are worth around $60 billion, the second largest export behind pharmaceutical products, which are exempted from tariffs.
So, tariffs are no doubt a loss for Europe, South Korea, and Japan. If they do not want to see sales fall, companies can choose to eat the tariffs and keep prices stable, but that would still cut into their profits. A contraction in their revenues would limit their ability to invest, contracting economic activity. Although it is hard to quantify, this is not a minor driver of growth, considering that Volkswagen, Toyota, Stellantis, Mercedes, BMW and Honda are among the top European and Japanese R&D spenders. Automakers make 5% of German GDP.
The promised massive investments in the United States are also major concessions to the US. The agreements with South Korea and Japan are especially harsh, as the Memorandum clearly states that the US will choose the investments and keep 90% of the profits. The situation is worse for Japan, which has already set up a facility to manage the investments supported by public finance. It is not clear where Japan will find the money, close to one-third of its annual tax revenues.
Besides the economic losses due to tariffs, estimated between 0.5% and 1% of GDP, the main defeat is political. It shows that the EU, South Korea and Japan are willing to give up quite a great deal to preserve the relationship with the United States, strained as it may become. This signals to the Trump administration that it can pursue the same strategy in other domains, by using its military umbrella as leverage. It will also inevitably signal to other actors that these partners can be pressured: rivals like Russia have surely read this as a sign of weakness, which opens the door to insert themselves into this dynamic, creating new opportunities to court Washington with the prospect of fresh concessions from its allies.
The US Angle
Did the US win the deals? In economic terms, probably not. Many components of American-made cars are sourced internationally. The Financial Times ran a story about the supply chain of the most favoured pick-up truck, the Chevrolet Silverado, showing the countries where key components are manufactured, all hit by high tariffs.
This effect is compounded by sector-specific tariffs on car parts, which stand at 25% for all countries. The American automotive supply chain is highly integrated with Mexico and Canada, so a 25% tariff, even with the exemptions granted to Canada and Mexico, hardly supports US manufacturers’ competitiveness. 50% tariffs on aluminium and steel do not help either.
American Automakers were displeased with the deal with Japan: “Any deal that charges a lower tariff for Japanese imports with virtually no U.S. content than it does North American-built vehicles with high US content is a bad deal for the US industry and US auto workers”. The autoworker union was similarly unhappy: “The UAW is deeply angered by the Trump administration’s announced trade deal with Japan. What we’ve seen so far makes one thing clear: American workers are once again being left behind.” This is not just positioning, Bloomberg reported that General Motors lost $1 billion in revenues due to tariffs in the first half of the year.
Cars are only one example, of course. More generally, this shows that tariffs impact domestic manufacturing, driving up production costs and reducing productivity. The result is lower exports, which undermines the intended role of tariffs in narrowing the trade deficit – there is sound evidence of this in the economic literature, including from Trump’s first term.
In general, tariffs have had a small but sizable effect on inflation, which has crawled back up from 2.3% to 3% from April to September3, with a more pronounced effect on food (2.1% to 3.1%). The price increase certainly contributed to building a general sense of distrust in the current administration regarding affordability, so much so that Democrats running on affordability swept the local and state elections in November. After a few weeks, tariffs on agricultural products were rolled back, a clear admission of defeat from the White House.
What about the other provisions in the trade deals? Some of them are just impossible. The EU pledged to buy $250 billion of American LNG per year. This is 85% of the European total consumption, which is declining, and more than 100% of total American exports. South Korea should buy another $100 billion. Even assuming that the European market could absorb the promised amount, that would imply a massive rearrangement of global supply chains, which is unlikely to happen.
Even the promised investments in the United States are not legally binding, and the wording is ambiguous enough to be open to different interpretations from the two sides. Moreover, the joint EU-US statement says that “European companies are expected to invest an additional $600 billion across strategic sectors in the United States through 2028.” Not a formal commitment but a vague expectation. The EU cannot and likely does not want to force the private sector to invest in the US.
However, the most important point about these investments is that they would fundamentally undermine the goal of reducing the trade deficit, especially if all of them occurred as desired by the Trump administration. This is because foreign investment in a country increases that country’s trade deficit. In a nutshell, the accounting identity:
means that net capital inflows correspond to trade deficits, outflows to trade surpluses (see this excellent primer by Paul Krugman for a complete and easy-to-understand explanation). So, the US trade deficit would increase by $450 billion every year until 2028. So, the EU, Japan, and South Korea would still “take advantage” of the United States, hardly a success relative to the original goal of reducing the trade deficit. We must then ask whether reducing the trade deficit is the true objective of these trade wars, or whether it instead masks other underlying motives.
Reshoring manufacturing, raising revenues, or a grand bargain strategy
There are other possible reasons for imposing tariffs on every trade partner, according to people in the Trump administration. Officials have given three major reasons for tariffs: 1) A bargaining strategy to obtain concessions and “make a deal” from adversaries and allies, which we have already seen; 2) Reshoring manufacturing; 3) raising revenues.
These reasons all contradict each other or make little sense. On the one hand, if the idea was to get leverage to extract concessions from trade partners, a lot of concessions have indeed been obtained from several trade deals. However, tariffs are still in place even after the leverage has been used, so that cannot be the only reason. On the other hand, if manufacturing is brought back to the US, production becomes domestic, and tariffs cannot raise revenue anymore. The opposite is also true: if tariffs continue to produce high tax revenue, that signals that manufacturing is not being relocated to the US, with the additional caveat that tariffs contract economic activity, reducing tax revenue from other domains.
The most important reason is reshoring. Trump himself, as well as his aides, claimed that tariffs will ultimately bring back manufacturing to the US. This has been a consistent problem in American politics since Trump’s first term. There are several strategic domains where China, in particular, has a significant lead over the US manufacturing capacity, while others – mainly semiconductors – have been lost to allies. This goes hand in hand with reducing the trade deficit.
Of course, it takes time to rebuild a whole supply chain, but there are signs that this is not working. In the year since Donald Trump’s election, almost all the manufacturing sectors have been losing jobs, 94,000 in total. For context, 800,000 were added during the Biden administration, compared to 2,5 million in healthcare. The manufacturing sector has been contracting for nine consecutive months, mostly due to the higher import costs companies are facing, as we discussed. This could eventually change as industries move production facilities to the US, but it remains to be seen whether reshoring can be cost-competitive or would permanently impose higher costs on American society. After all, companies have facilities in foreign countries because that allows them to maintain lower operational costs.
The other major factor is uncertainty. Trump has changed the tariff regime so many times that companies could not decide whether they had to move production to other countries, to the US, or stay put. Many just decided to sit on their cash and freeze their investments, with the consequences on the job market we mentioned. In October and November, business associations were delivering tens of briefs to the Supreme Court4 to strike down the tariffs. It is certainly significant that AI and data-centre firms, the largest booming sector in the US economy, can import most equipment under tariff exemptions.
There are other contradictions as well. While everybody in the administration agrees on reshoring, it is less clear whether this would also include bringing back blue-collar jobs, a key issue for depressed rural communities that form the electoral backbone of Trump’s coalition. Secretary of Commerce Howard Lutnick claimed the US was going to bring back chips, steel, aluminium, and even “The army of millions and millions of human beings screwing in little, little screws to make iPhones… that kind of thing is going to come to America. It’s going to be automated.” So it could be reshoring without jobs. It is also unclear how tariffs on bananas would help banana cultivation in the US, given that bananas do not grow in North America.
Also, why did Trump impose tariffs on countries like Mexico and Canada, which might help the American reshoring effort, in what was called friend-shoring under Biden? In that framework, the burden of reshoring is shared with aligned nations, placing key stages of production in allied countries that hold competitive advantages America lacks. That would build supply-chain resilience without paying the full economic price of doing everything domestically.
What about India, a key Washington ally in the containment of China, hit with a 50% tariff? The official reason, India keeps buying Russian oil, is even more contradictory, considering that Russia is one of the very few countries not tariffed.
And why the tariffs on Vietnam (46% now down to 20%) and Malaysia (24% now down to 19%)? Is the US going to reshore Nike, given that a worker would earn around ten times more than their Vietnamese counterpart? Given that there is simply no market for American products in many African countries, why tariff them? It’s hard to understand the rationale behind this. It becomes tempting to think, as Adam Tooze does, that it is only a mythical narrative in which the US is just acting as a giant that was wronged in its sleep and is only now getting on its feet, to trample those who took advantage of it.
Who wins the trade wars
We left out of the picture the elephant in the room, China. It was with China that the most significant escalation happened. After Trump announced 34% tariffs on China on Liberation Day, on top of the 20% tariffs from his first term, which have never been lifted. China answered with an identical tariff on American products, and Trump escalated, increasing the tariffs to 84% and then to 125% after another Chinese response, in just a little more than a week.
The situation achieved the effective decoupling of the world’s two largest economies, but when China introduced an export control licence system for rare earths, the US agreed to reduce the total tariff rate to 30% – including the 20% already existing before Liberation Day. This came with basically no Chinese concessions to the United States, except that American customers “should get Chinese rare earth permits more easily”, that is, the restoration of the status quo.
A similar dynamic played out in October, when the US extended export-control measures on semiconductors to the subsidiaries of Chinese companies to prevent sanction evasion. China once again enforced stricter export controls on rare earths and forced the US to withdraw the measures and every escalation threat for one year, in exchange for issuing one-year general licenses for US end-users. The US also committed not to escalate the trade dispute.
In other words, China has effectively won every round. Each cycle of escalation has ended with Washington rolling back its new measures and Beijing offering a return to the pre-crisis baseline. At the same time, China gains on other fronts. The “Liberation Day” tariff architecture now leaves Chinese goods facing an additional 10% charge on the US market, while other manufacturing economies pay more – for example, 19% for Malaysia and 20% for Vietnam, as we have seen. That improves the relative competitiveness of Chinese products compared with the pre-Liberation Day status quo.
Moreover, Chinese exports are surging almost everywhere. Chinese exports have been growing 10% yearly, compared to 3% globally, and the trend has continued in 2025 so far. Because this seems to be related to weak domestic demand in China, as found in an ECB report, it’s likely not going to change anytime soon, while the same report also recognises that “escalating trade tensions between the United States and China might result in a further diversion of Chinese exports to Europe.”
This interacts directly with the tariffs on European, Japanese and Korean products. Those tariffs squeeze three of China’s main competitors in advanced manufacturing, cutting into their global income and weakening their firms’ ability to face competition from cheaper Chinese products. The net effect is that China emerges from the trade war structurally better positioned in global manufacturing than before Liberation Day was announced.
With the main trade agreements in place, the relevant question shifts to how countries will adjust their domestic policies to accommodate them. The fiscal, industrial and social choices made in Europe, Japan and South Korea will determine how the new tariff environment affects investment, competitiveness and, ultimately, the living standards of their citizens. In Europe, this is already reflected in emerging calls for a “Europe-first” agenda, with parts of the business community arguing for a scaleback of environmental regulation and welfare commitments to preserve competitiveness under the new conditions. Over the medium and long term, these adjustments will shape the broader economic landscape and the distribution of costs and benefits across households and firms.
Acknowledgements
We want to thank Joseph Politano, Adam Tooze, Richard Katz, Sam Lowe andPaul Krugman for the insights their work continues to offer. Their analysis and the data they make available have been invaluable in helping us navigate this topic with clarity and precision.
Actually, a trade deficit is not always necessary: the US has a trade surplus with the UK, yet Trump still imposed 10% tariffs. Let’s not even start with tariffs on penguins.
Except Canada, Mexico and, interestingly, Russia, Belarus, Cuba, and North Korea.
There are no data for October and November due to the government shutdown, a problem for another time.
The Supreme Court heard arguments and is currently evaluating the legality of the tariffs. Were they struck down, the Trump administration would have alternative ways to reintroduce them on most products, but that would