Trade Deals in the Time of Tariffs
The reciprocal levies aimed at allies have been paused for 90 days, now what?
By Oren Cass, chief economist at American Compass.
President Trump made a prudent course correction in his tariff program yesterday, holding firm to the 10% global tariff but suspending the “reciprocal tariffs” on all countries except China for 90 days while negotiations proceed. Snapping high tariffs into effect before talks could even begin had been a weak point in his strategy, creating substantially larger costs and disruptions than necessary with few attendant benefits.
Such a pause falls more closely in line with the steady course of action I have previously suggested. I first underscored the need for “a clear schedule of gradually increasing tariffs” in February, at the outset of the conflicts with Canada and Mexico. In March, I recommended a six-month grace period as an element of any broader plan and highlighted predictable timelines as a must-have for Liberation Day. Two days after Trump’s sweeping announcement, I reiterated that “a predictable and credible phase-in for tariffs can achieve nearly the same positive effects of an immediate imposition, while greatly reducing the costs.” The day before he announced his course correction, I wrote of the reciprocal tariffs in the New York Times that “the first priority should be to scale them up more gradually, to give markets and allies time to adapt.”
The 90-day suspension gives trading partners who did forgo retaliation and express a desire to deal the time to do just that. Much productive investment would have been on hold during the negotiations anyway; now, many of the associated disruptions of large and immediate tariffs can be avoided. And while some supporters of the more aggressive tariff schedule worry that a grace period will reduce leverage by weakening the credibility of the tariff threat and the ongoing pressure to find a solution, the slightly slower approach improves the American position in important ways too.
The major benefit of the suspension is to stagger future conflicts. The United States has enormous leverage over each individual country, but less against all of them combined. Imposing reciprocal tariffs on most major trading partners at once had the potential to disrupt virtually all American trade, while each impacted country would only see disruption in trade with one of its partners, the United States. Likewise, the United States would be attempting to manage negotiations with all countries simultaneously, while other countries would only need to worry about one, and could even make common cause against the United States in teaming up to exert leverage of their own.
Now, the United States can divide and conquer, and the incentive for countries to deal is much stronger. The more agreements reached, the stronger the American position becomes with those remaining. Better to move first. The hope has vanished that if everyone drags their feet for a while the United States might lose its nerve. If the administration is able to move forward with renegotiation of USMCA in the coming months, reach agreements with a couple of major trading partners, and make sufficient progress with several others to announce further suspensions, a much smaller set of still-recalcitrant countries will find themselves in the cross-hairs of a much more focused and credible threat.
The suspension also allows the United States to focus more of its tariff power on China. As economist Jason Furman noted yesterday, “in important respects tariffs are now higher” after Trump’s announcement because “we’ve gone from 54% to 125% on China, our third largest trading partner. That outweighs delaying the increases on 70+ others.” And so long as China’s exports are practically barred from the U.S. market, they will have to flood into other countries—the same countries that the United States is asking to help with putting up barriers to China, and whose only alternative to joining a U.S.-led bloc would be falling into China’s sphere. Such a prospect will look less and less appealing as Chinese goods flood world markets. Moving closer to China would be “cutting your own throat,” Secretary of the Treasury Scott Bessent warned European leaders in remarks on Wednesday. “They just keep producing and producing, dumping and dumping, and it’s going somewhere.”
Of course, seeing as I thought going straight from “0 to 60” on China tariffs was too abrupt and risked excessively costly disruption to American firms and supply chains, I certainly think going straight to 145% is unwise. Trump framed the dramatic increase as a response to China’s retaliation, but that retaliation was unsurprising. Insofar as the long-term goal is to decouple from China, as it should be, and as some Trump officials have indicated, the United States should expect substantial tariffs, ultimately, applied by both sides. Indeed, those barriers will help to accelerate the decoupling.
Conversely, though, other Trump officials have indicated the goal is to reach a grand bargain, which tariff pressure is supposed to facilitate. Trump himself has remarked that he might want to see Chinese car companies building factories in the United States. Suffice to say, welcoming the CCP’s national champions into the American market is not a recipe for inducing major capital investments from other firms. The administration needs to explain what it wants the future relationship with China to be.
Next, Trump should segment off the majority of countries whose volume of trade with the United States is immaterial to the overall trade deficit. These countries cannot get away scot-free, but they might be given quite straightforward terms: don’t let trade imbalances rise above current levels, and adopt U.S. policies for limiting China’s access. Who cares about Madagascar when we just want their vanilla? Maybe no one, now. But leave them alone altogether and watch how quickly Chinese products begin appearing on American shelves with “Made in Madagascar” tags. Some of these countries will decide they prefer membership in a China-led bloc, as is their right. In that case, the China-bloc tariffs go back on.
Left to focus on major partners with large trade surpluses, the administration should be able to make sufficient progress with a wide range of countries to conclude some agreements and extend the tariff suspensions for others, leaving just a handful remaining to face hardball tactics. The cost to the United States of failing to reach agreement and therefore imposing tariffs would be much lower if occurring in only a few cases. The benefit to those countries in getting onboard would be much higher if they were signing up for a deal that had already been widely adopted by other trading partners.
While happy outcomes are easy to describe vaguely and breezily, the process in reality will be much harder and messier. Three months will almost surely be inadequate, and the administration would do well to consider developing and announcing a wider range of staggered timelines sooner rather than later, lest eventual postponements appear as defeats. Ideally, key dates for high-stakes negotiations will not overlap with the points at which domestic pressures in Congress on both a debt-limit increase and reconciliation for a tax deal likely come to a head. Most importantly, the administration needs to be much clearer about its demand and its end goals. Council of Economic Advisers chairman Steve Miran offered by far the best effort to date in remarks at the Hudson Institute on Monday, detailing “a few ideas”:
First, other countries can accept tariffs on their exports to the United States without retaliation, providing revenue to the U.S. Treasury to finance public goods provision. Critically, retaliation will exacerbate rather than improve the distribution of burdens and make it even more difficult for us to finance global public goods.
Second, they can stop unfair and harmful trading practices by opening their markets and buying more from America.
Third, they can boost defense spending and procurement from the U.S., buying more U.S.-made goods, and taking strain off our servicemembers and creating jobs here;
Fourth, they can invest in and install factories in America. They won’t face tariffs if they make their stuff in this country;
Fifth, they could simply write checks to Treasury that help us finance global public goods.
This is a very good start. More along these lines is needed—on adversaries, on bloc structure, on timelines. What does the administration hope to accomplish by Day 90? What milestones will measure progress? How long will it take to reach the end goal, whether in balanced trade or the kinds of offsetting actions described? What policies do we expect our trading partners to adopt with regard to China? Will there be a gathering at a classic resort to establish these parameters and initial agreement about them?
With so many negotiations proceeding in parallel, and a need for coordination amongst the final agreements, dictating terms in advance is in the U.S. interest. The administration has already been fully transparent on the consequences for failure. Now it should present the terms for success, and then tell each country it has no room to give because it is asking the same of the others—and of itself. My version of the core demands is: balanced trade within the alliance, ownership of security burdens in each region, and keeping China out. A strong, public commitment from the United States to those principles itself would be relatively costless (they are already U.S. goals), highly clarifying, and constructive in making clear that the objective is alliance, not domination. If some countries don’t like it, then China, with an extra surplus of goods it now needs to dump into someone else’s market, would love to talk.