William Krist's Blog, page 5

Are Value-Added Taxes a Barrier to Trade?

On 13 February 2025, the United States administration announced the “Fair and Reciprocal Plan”, directing the development of a comprehensive strategy to address non-reciprocal trade practices, including value-added taxes (VAT), which the administration considers discriminatory towards US businesses. This ICC policy brief provides an overview of the main features of VAT, operational mechanics, and neutrality in international trade. It clarifies that VAT is a consumption tax – not an import tariff – and highlights how VAT, by design, treats domestic and foreign businesses equally. This brief concludes with key takeaways on the importance of understanding the differences between VAT and tariffs for purposes of international trade policy

A. What is VAT?

VAT is a consumption tax levied on the supply of goods and services – similar to sales tax in the United States – but with some key differences. While businesses collect and pay VAT throughout the supply chain, the tax is ultimately borne by the final consumer. It is generally considered neutral for businesses, ensuring a level playing field for both foreign and domestic companies.

B. How does it work in practice?

The VAT system operates through a multi-stage payment mechanism: when a business buys a good or service from its supplier (inputs), it pays VAT. When that same business then sells its own goods or services (outputs), it collects VAT from its customers. The business then calculates the amount of tax owed to the tax authorities by taking the input VAT it collected from customers and offsetting it against the VAT it paid to suppliers, resulting in a net tax liability. This mechanism ensures that VAT “flows through” the business and ultimately rests on the final consumer. At each stage of the supply chain, businesses are entitled to fully deduct the input VAT they have incurred. This ensures that the tax burden ultimately falls on the final consumer and does not unduly burden businesses within the supply chain.

Because VAT can be an effective way to raise government revenue without creating barriers to international trade, VAT has been adopted by over 170 countries globally. Some countries call it Goods and Services Tax (GST) instead of VAT, but the concept is the same. The United States is a notable exception, being the only major economy that does not apply a national VAT. Instead, it relies on a system of sub-national sales and use taxes at the state level.

C. What does it mean that VAT is neutral?

VAT systems are designed to treat all businesses equally, regardless of their location or origin. This principle of neutrality ensures that no business has an unfair competitive advantage or suffers disadvantage solely because of where they are based, which may otherwise distort international trade and limit consumer choice. The cornerstone of VAT neutrality is the destination principle, which stipulates that goods are taxed in the country where they are consumed, not where they are produced. Under the destination principle, exports are exempt from VAT in the country of origin, while imports are subject to the same VAT as equivalent domestic goods in the destination country. This ensures that all products competing in the same market face identical tax treatment, regardless of their origin.

Neutrality for business is ensured at each stage of the supply chain through input VAT deduction (the right for a business to deduct VAT incurred on its purchases as input VAT), which makes it a tax borne and paid by the final consumer.

D. Is VAT discriminatory towards foreign business?

No. Due to its design, VAT ensures a level playing field for businesses whether locally established or established abroad.

In concrete terms, this means:

• If a business makes purchases from a local supplier for its operations (for example, manufacturing goods), it pays domestic VAT to that supplier, which the business then deducts as input VAT.

• If the same business makes purchases from a foreign supplier (for example, imported raw materials), it pays import VAT, which is likewise deductible as input VAT, thereby ensuring VAT neutrality.

• Whether the business is established locally or abroad, it is treated on equal footing — provided that appropriate business structures are in place. While VAT is collected at various stages in the supply chain, its design ensures neutrality for business both for local and foreign business who are only the collectors.

E. So, is VAT comparable to a tariff?

No. VAT is not the same as a tariff. Here’s why:

Definition and mechanism:

• VAT is a consumption tax applied to the value added at each stage of production and distribution of goods and services. It is typically collected at the point of sale to the final consumer. Even when VAT is due on an import, it is deductible, meaning that the tax burden ultimately will be borne by the consumer and will be the same for domestic and imported goods.

• Tariffs, on the other hand, are taxes levied specifically on imported goods. While they generally do not have a deduction mechanism similar to VAT, certain schemes such as duty drawbacks, free trade zones, and inward processing may allow for tariff relief in specific cases.

• Scope of application: VAT is a broad-based tax applied to most goods and services consumed withina country regardless of origin, whereas tariffs are limited solely to imported goods.

• Impact on prices: While both VAT and tariffs can impact prices, they do so through different mechanisms. Tariffs directly increase the cost of imported goods, while VAT is generally passed on to consumers as part of the product price and applied equally to both domestic and imported goods.

F. Conclusion

VAT and tariffs are substantially different not only in scope but also in terms of the impact they have on trade and the overall economy. VAT is neutral by design. Viewing it as a reciprocal tariff could lead VAT-imposing countries to adopt retaliatory measures, potentially escalating trade conflicts unnecessarily.

Finally, some additional considerations to note:

• Targeting the use of VAT regimes could encourage the adoption of other harmful tax or non-tax policies (such as imposing customs duties on electronic transmissions).

• While VAT is neutral from a tax perspective, its practical implementation creates significant burdens for businesses, particularly micro-, small- and medium-sized enterprises (MSMEs). Simplifying VAT compliance and refund processes would benefit both businesses and tax authorities – reducing compliance costs and improving compliance for companies while lowering administrative costs and improving tax collection efficiency for governments.

2025-ICC-Are-value-added-taxes-a-barrier-to-trade

To preview the policy brief as it was published, click here.

To read the full PDF, as it was published by the International Chamber of Commerce, click here.

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Gauging Business Exposure to Trump’s Emerging Reciprocal Tariff Plans

With US President Donald Trump threatening to redefine fairness in global trade by imposing reciprocal tariffs, some sectors and economies will be in line for a bigger impact than others. Here, we explore the biggest risk factors and what they mean for companies navigating this significant shift in the American protectionist narrative.

Profitably breaking into foreign markets is hard to pull off – and for some executives, it is about to get harder. The new US Administration wants to rewrite the rules concerning import taxes. Gone are the days when a deal was a deal and executives could take the rules of the global economy for granted. President Trump’s plans for “reciprocal tariffs” will fall harder on some sectors and trading partners than others. Our goal here is to support executives as they assess their exposure to this latest bout of protectionist risk.

Because each country’s firms and sectors differ in competitiveness, in previous rounds of trade bargaining smart governments deployed their negotiating capital to selectively open up foreign markets. This created a situation where import taxes tended to get negotiated away in a nation’s more competitive sectors and retained elsewhere. In the past, what mattered in a trade deal was that each participating government reckoned they had enough potential export, investment, and job gains to overcome local opposition to opening up their economy. Back then, these trade deals were seen as fair because no government was forced to sign them and gains were concentrated in the sectors firms and officials cared about.

Cross-country differences in sectoral competitiveness inevitably meant that global trade deals involved differences across countries in the import taxes (tariffs) levied on the same good. For example, the European Union levies a 10% import tax on cars, and, for most vehicles, the US only charges 2.5%. The Americans would only have accepted this differential if they had received some other benefit – often in the form of lower tariffs on another good – from the EU. Essentially, trade-offs across sectors greased global trade deals. Unequal tariffs were a feature, not a bug, of post-war trade deals.

This type of hard-nosed, commercially valuable horse trading isn’t good enough for President Trump. At a press conference on 7 February with Japanese Prime Minister Shigeru Ishiba, the President proposed “reciprocal tariffs where a country pays so much or charges us so much and we do the same. So, very reciprocal because I think that’s the only fair way to do it. That way nobody’s hurt. They charge us, we charge them. It’s the same thing.”

Taken literally, the President wants to redefine fairness in trade deals to mean that each country should charge the same import tax on each good as the United States – although he probably wouldn’t object to foreign governments imposing lower import taxes than the United States, thereby giving American firms an edge.

Eliminating import tariff differentials can be done in multiple ways. However, given his anti-import instincts, the expectation is that Trump wants to raise US import tariffs to levels charged by a foreign government. The alternative, of course, is for foreign officials to lower their import taxes to US levels – which would affect conditions of competition for firms in the liberalizing economy.

In principle, implementing a reciprocal tariff plan means that the US charges a range of different import tariffs on the same good, linked to the tariff charged on the same good in a trading partner. Let’s leave aside the nightmare of having to administer such a complex import tax system – with at least 5,000 product categories and around 200 trading partners, that could mean around a million different US tariff rates to be issued and enforced. What is at stake here for firms that sell a lot into the United States is that they may suddenly experience a jump in the import taxes they pay. These firms will either have to accept lower profit margins or find ways to pass on the higher import taxes to customers, some of whom may defect to other suppliers.

As is so often the case with Trump’s trade policies, both the details and the timing are unclear. On his way to Superbowl 2025, he told reporters he would announce his reciprocal tariff plan on 11 or 12 February 2025. That deadline has passed. His senior aide, Peter Navarro, told CNN on 11 February 2025 that the plan was still in the works, possibly weeks away.

Inevitably, this fuels suspicions that Trump has issued yet another threat that he won’t follow through on. But tell that to the Chinese, whose exporters now pay 10% more import taxes than a month ago. As David Bach, Richard Baldwin, and one of us wrote last month, the deliberate generation of policy uncertainty is a trait of President Trump’s governance style. Prudent risk management requires an assessment of exposure to the President’s potential reciprocal tariff plan even if, ultimately, it does not come to pass.

Five factors driving firm risk exposure

For ease of exposition, let’s focus here on those firms that are based outside the United States and want to sell to customers based in America. Similar considerations arise for American firms that seek to source goods from abroad. Five factors drive risk exposure. Some are country-specific, and the rest product-specific. Here is a checklist to work through.

The share of service revenues

First, Trump’s reciprocal tariff plan applies to cross-border shipment of goods into the United States. Cross-border delivery of services is unaffected. For some firms that sell goods, create an installed base in the United States, and service them, the service revenues won’t be affected by the US President’s new plans. The higher the share of services revenues, the lower the exposure to this reciprocal tariff plan.

The level of foreign import tariffs

Second, leveling up US tariffs to higher foreign levels requires that the latter be above zero in the first place. So, if a firm’s export operation is based in a nation that applies zero import tariffs on the goods that it exports, there isn’t any exposure. Some governments have signed trade deals, including regional trade agreements, where tariffs for certain products were abolished. In other cases, a government chooses independently not to charge import taxes. In these circumstances, Trump and his officials have no grounds for complaint, at least on import tariff grounds. The import tariffs charged by governments are published by the World Trade Organization, so firms can quickly check if they are in the clear.

The focus of US trade policies

Third, the firm has to be selling a product to the United States that US firms or their government want to export more of. Plenty of commodities and products fall below the radar screen in Washington, DC. President Trump tends to focus on iconic products such as vehicles and American crops.

The geopolitical importance of trading partners

Fourth, the economies of some of America’s trading partners may be too small to attract Washington, DC’s ire. Or they may be too geopolitically important to be picked on. In addition, the President likes to cut side deals – so even if his reciprocal tariff plan comes into force, its application may not be uniform. Foreign firms may also be able to secure exemptions – putting a premium on having the right legal and lobbying clout in Washington, DC. Indeed, obtaining an exemption could turn this situation into a competitive advantage for a well-connected firm.

The import tariff gap

Fifth, to be at risk, a firm must export a product line to the US from a nation that charges a much higher import tariff on that product. For example, if India charges an import tariff of 30% on widgets and the United States imposes an import tax of just 10%, then there is a 20% differential. Should the US raise its tariffs to 30% to match those of New Delhi, an Indian exporter of widgets would have to assess the hit to their volume sold, revenues, and margins. In turn, this begs the question: how often are import tariffs that unequal?

Which export locations are most at risk?

The table shows for several leading export destinations of the United States how often the foreign tariff is way above, roughly equal to, and way below the level charged by the Americans. This table makes for sober reading for exporters from Brazil, India, and Malaysia. Nearly 20% (19.2%) of the products that India could export have import tariffs into the United States that are 20% or more lower than those charged at home.

Put differently, only one-eighth of products made in India are protected with import taxes by New Delhi that are roughly the same or lower than that charged by US customs officials. Exporters from Brazil and Malaysia are less exposed to the risk of significantly higher US import tariffs if President Trump’s reciprocal tariff plan comes into effect.

Fewer firms that use the European Union, Japan, and the United Kingdom as export platforms to the United States are at risk of significantly higher import taxes. Even so, exposure must be assessed on a case-by-case basis by checking published import tax rates. After all, the table reveals that 3.6% of products made in the European Union enjoy the benefit of import taxes that are at least 10% higher than in the United States.

These findings do not support President Trump’s strident criticisms of EU, UK, and Japanese trade practices. In fact, if the President seeks to narrow actual import tariff differences, then his Administration is going to curtail significantly access to United States customers of exporters based in the larger emerging markets. The realization that unequal import tariffs do not provide a rationale for hitting the imports of the United States’ G7 and European allies may account for the delay in announcing this reciprocal tariff plan.

Export revenues earned in the United States contribute significantly to the top line of many international companies. During the presidential election campaign Trump advocated blanket across-the-board import tariff increases – to which, in principle, every foreign exporter was exposed. In contrast, President Trump’s reciprocal tariff plan will have a more granular impact, harming some foreign firms and possibly benefiting others. Assessing exposure to this trade threat requires a much more nuanced approach.

To read the full article as it appears on I by IMD’s website, click here.

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Donald Trump Wants Reciprocity in Trade: Here’s a Closer Look

The president’s plan for reciprocal tariffs sounds good in theory. But there was a reason the United States abandoned the approach a century ago. The gains would be few and the costs enormous.

President Donald Trump is right about reciprocity—a fair balance of tariff concessions among countries has long been integral to U.S. trade policy. But his administration seems confused about how it works in the real world. And his plans—such as they are known—for imposing reciprocal tariffs on a country-by-country basis would be an administrative nightmare.

The White House announced Thursday that it was directing the U.S. Trade Representative’s Office and the Department of Commerce to launch an investigation into tariff and other trade practices around the world to establish the new reciprocal U.S. tariff rates. “It’s time to be reciprocal,” Trump told reporters earlier this week. “You’ll be hearing that word a lot. Reciprocal. If they charge us, we charge them.” But perhaps recognizing the complexity, the White House is moving slowly; trade advisor Peter Navarro said the administration would first “look at all our trading partners, starting with the ones with which we run the biggest trade deficits.”

Reciprocity, to be clear, is a powerful idea. The American people would never have supported the gradual removal of tariffs and other barriers to freer trade without a belief that other countries were doing the same. The growing sense that others—especially big developing nations such as China and India—are not making similar commitments has certainly weakened U.S. public support for the global trading system. In the best possible outcome, Trump’s reciprocity initiative could open the door to negotiating long-overdue corrections to those discrepancies. But poorly enacted, it would blow up what remains of global trade rules and leave American companies crippled in their ability to compete in international markets.

Reciprocity has been the foundation of U.S. participation in global trade negotiations since the 1930s. In 1934—chastised in part by the disaster of the 1930 Smoot-Hawley tariff increases, when other countries raised their own tariffs to retaliate against the United States—Congress empowered President Franklin D. Roosevelt to negotiate “reciprocal” tariff reductions with other countries. The 1934 Reciprocal Trade Agreements Act (RTAA) led to the negotiation of nearly two dozen agreements over the next five years to lower U.S. and foreign tariffs, including with the two largest trading partners, Canada and Great Britain.

At the time, both Congress and the president recognized that negotiating specific tariffs on a country-by-country basis would be impossibly complex; overburdened Customs agents would have been forced to determine the national origins of every product entering the country in order to levy the proper tax on the U.S. importer. Instead, starting in 1923, and then legislated by Congress in the RTAA [PDF], the United States embraced what would become known as the “most-favored-nation” (MFN) principle, in which U.S. tariffs on imports would be identical for all countries, with occasional exceptions for goods deemed unfairly traded or for free trade partners.

Reciprocity and the MFN principle turned out to be world-changing ideas that over the following decades persuaded most countries to lower tariffs and participate fully in global trade. In the United States, as trade economist Richard Baldwin has argued, the idea of reciprocity turned the politics of trade on its head. U.S. companies that were competitive in global markets—and after World War II, the United States was the most competitive manufacturing economy in the world—recognized they could only win tariff reductions abroad if the United States was also prepared to cut its tariffs at home.

Baldwin calls this “the juggernaut effect.” In the post–World War II global trade negotiations under the General Agreement on Tariffs and Trade (GATT)—the forerunner of the World Trade Organization (WTO)—countries recognized that to win tariff cuts in overseas markets they would have to cut their own tariffs. Baldwin argues that the embrace of reciprocity “rearranged the politics of tariff cutting inside each nation in a way that made liberalization a self-sustaining cycle.” Big exporting companies like Boeing or Caterpillar knew that to open new markets abroad they would have to stand up to protectionist lobbies such as steel or textiles that favored higher U.S. tariffs to protect against low-priced imports.

That cycle is no longer self-sustaining. The Trump administration’s tariff approach calls for “raising” tariffs to the level of other countries on a product-by-product basis. The last time Congress raised tariffs in the name of reciprocity was the McKinley Tariff of 1890 [PDF], which hiked duties to an average rate of nearly 50 percent on many products from countries that had “unequal and unreasonable” tariffs on U.S. imports. The price increases that resulted from the tariffs, coupled with a downward spiral in farm prices, created major political backlash against the Republican proponents of the tariffs and was followed by a severe depression from 1893 to 1896.

This time, Trump is signaling he would go much further. To put it simply, the United States would charge the same tariffs on imports that it faces on its exports. A favorite target for Trump is the European Union’s 10 percent tariff on imported cars; the United States charges just a 2.5 percent import duty on cars (though a hefty 25 percent on the light trucks and sport utility vehicles most Americans prefer).

But U.S. officials told reporters Thursday that the White House is seeking a more ambitious approach in which the tariff rate would also take into account foreign-government subsidies, exchange-rate depreciations, and the export-promoting effects of value-added taxes like those used in Europe. Calculating reciprocal tariffs based on such a stew of inputs is more or less impossible, though U.S. officials will presumably make best-guess estimates. And if other countries retaliate on a similar basis, it could produce a global spiral of tariff increases.

The main U.S. targets are large developing countries such as China and India. Both countries had long closed their markets to imports, often maintaining tariffs exceeding 100 percent. When they joined the GATT and the WTO, they were recognized as developing countries and permitted to enjoy the benefits of tariff cuts across the world without making fully reciprocal cuts of their own.

With the growing wealth of China, India, and other large developing countries, that anomaly has become a much bigger problem. Last year, China ran a record trade surplus of nearly $1 trillion with the world, nearly a third of which ($295 billion) was with the United States alone, even though the United States has hiked its tariffs on China significantly under the Section 301 actions initiated in the first Trump administration. Other countries that maintain higher tariffs include Brazil and India, whose prime minister, Narendra Modi, visited the White House this week. As former U.S. trade negotiator Mark Linscott argues, the failure of reciprocity-focused tariff negotiations at the WTO, with a particular focus on those large developing economies, has allowed them to maintain unreasonably high tariffs.

The stalling of tariff cuts through WTO negotiations was one of the reasons many countries around the world upped their game in pursuing bilateral and regional free trade agreements as the vehicle for reciprocal tariff reductions. The European Union boasts of more than forty trade agreements with seventy countries spread across the globe, including agreements with the United States’ partners in the U.S.-Mexico-Canada Agreement (USMCA). In addition to USMCA, both Canada and Mexico are parties to free trade agreements with more than forty-eight countries, while even China and India have recently joined a number of regional or bilateral preferential arrangements. Globally, there are more than 370 regional or free trade agreements in force. However, since 2009, the United States has placed itself on the sidelines of such action, leaving its tariff arrangements with its trading partners largely frozen in time.

How Trump will achieve his desire for reciprocal tariffs remains murky. He has imposed, and then paused, 25 percent tariffs on Canada and Mexico, and imposed 10 percent tariffs on China, all using emergency powers. He plans to impose new 25 percent duties on steel and aluminum imports by doubling down on the national security investigation and findings under Section 232 of the Trade Expansion Act of 1962 that he used in his first term. But the legal basis for broad reciprocal tariffs is much harder to discern. All prior reciprocal tariffs have been imposed pursuant to negotiated agreements entered into under congressionally authorized processes, so achieving reciprocal tariffs this time around would seem to require congressional action. Some speculate Trump could dust off the old statute books to claim authority under Section 338, which grew out of Section 317 of the Tariff Act of 1922. Section 338 empowers the president to impose “new or additional duties” on imports from countries that discriminate against U.S. exports. But the authority has never been used in that way, and proving specific discrimination against American exports could prove challenging.

But the practical hurdles are perhaps bigger than the legal ones. If the tariffs are set to mirror precisely those charged by U.S. trading partners, it would mean that U.S. Customs and Border Protection would require different tariff schedules for each country—close to impossible for a short-staffed agency. Already, the Trump administration was forced to delay the immediate elimination of the de minimis exception for goods from China, which allows shipments of less than $800 to enter tariff-free under a truncated process, because Customs could not handle the volume of work associated with reviewing import documents and assessing duties on so many shipments.

Additionally, most companies and the Customs brokers that facilitate exports and imports do not pay much attention to the fine print of exactly where products are made, the so-called rules of origin. Rules of origin matter greatly for imports from free trade partners, for products covered by country-specific antidumping or countervailing duties, for goods coming from non-favored countries (such as Belarus, Cuba, North Korea, and Russia), and for preventing the import of products made with child or forced labor. But for all other shipments, there is no need to ensure rules of origin declarations are 100 percent correct, because it does not matter. Under the MFN rules, the tariffs are the same no matter where the goods were made.

It is also unclear whether the new U.S. tariffs will be calibrated to “bound” rates in other countries—which refers to the maximum tariff rate to which they have formally committed in the WTO—or to the actually applied rates. In developing countries especially, the actual rate charged is often well below their WTO obligation. If the goal is to match U.S. import tariffs to those charged on U.S. exports to a particular country, then the applied rates should be used, but those are frequently changed. Continuing to modify U.S. tariffs to keep up with those fluctuations could prove impossible.

Finally, raising U.S. tariffs in such a unilateral fashion would completely violate U.S. WTO obligations to keep tariffs within negotiated limits. That would put a stake through what remains of the WTO rules. Such wholesale violations would invite retaliation and discourage other countries from entering into a trade agreement with the United States, if the country will not keep up its end of the bargain.

Such developments would harm U.S. companies. Even those that could gain some small benefit from tariff protection would be overwhelmed by the complexity of importing under such a system. Many U.S. exports, especially dairy products, shoes, sugar, textiles, or tobacco, could be hit with higher tariffs if countries respond in kind by raising product-specific tariffs to U.S. levels. U.S. tariffs on sugar, for example, are much higher than in most other countries.

The lengthy investigation time directed by the president before any new tariffs would be imposed is encouraging. A serious effort to bring greater reciprocity into the trading system could benefit the United States. Other countries might reduce some tariffs unilaterally to head off U.S. actions. But a sudden, ill-thought-out initiative would leave American companies and consumers much worse off.

To read the article as it was published on the Council of Foreign Regulations website, click here. 

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Meeting China’s Trade and Tech Challenge: How the US and Europe Can Come Together

Part One: China’s emergence as a tech and trade superpower threatens both the US and Europe. The allies are struggling to respond.

For more than two decades, China has worked to free itself from dependence on Western technology while making the West dependent on Chinese products. It protects priority industries and subsidizes them into becoming export juggernauts. 

China engages in economic coercion. Its civil-military fusion strategy powers a significant buildup of its military, surveillance, and disruptive capabilities. Its aggressive territorial claims in the South and East China Seas, and its threats to Taiwan’s integrity, present real risks of military conflict. Beijing and Moscow’s declaration of a “no limits” strategic partnership, and China’s active support for Russia’s war on Ukraine, threaten US and European security, interests, and values. 

Although the transatlantic partners are closer in their assessments of the China challenge today than they were four years ago, they approach Beijing from different strategic positions, with different tools, and with different senses of urgency. They have allowed their own bilateral squabbles to get in the way of robust transatlantic efforts to address Chinese aggression. These simmering problems could boil over in 2025.

This series analyzes the impact of China’s rise on transatlantic ties and presents ideas about how to forge a constructive partnership to meet the China challenge. It is based on a yearlong series of CEPA-sponsored workshops of leading European and US experts that I chaired together with Lucinda Creighton under the Chatham House Rule.

The basic question we addressed is whether Donald Trump’s new administration and Europe’s new leaders believe their own bilateral disputes are more or less important than the need to adopt joint or complementary approaches to China. Does the Trump administration believe it can and should fight predatory Chinese economic practices on its own, or forge a broad coalition of countries that could impose far greater costs on China than individual efforts? Are Europeans willing and able to bridge their own considerable differences over both China and Trump’s America to help lead such a coalition? 

A joint approach to China should be guided by three Ds: deconflict, disentangle, and deny. The US and Europe should deconflict their own bilateral ties so they do not endanger transatlantic cooperation on China. They should disentangle their economies from uncomfortable dependence on China. And they should deny critical technologies, data, or goods to China that could advance Beijing’s military capabilities and revisionist goals.  

To deal with China, the transatlantic partners first need to deal with each other. A transatlantic accord could include European commitments to boost defense spending to 3% or more of gross domestic product by the end of the decade; bolster support for Ukraine; diversify from Russian energy; buy more US-produced liquified natural gas and other energy exports, agricultural products, and defense equipment; and refrain from levying unilateral digital services taxes on US firms. The US, in turn, could commit to maintain an active role in NATO, ensure Ukrainian security and sovereignty, refrain from imposing preemptive tariffs, and explore effective global tax reform. 

The two parties should streamline the US–European Union (EU) Trade and Technology Council, now ensnared in an unwieldy tangle of many working parties, with three strong pillars. Pillar One would focus on mitigating US-EU disputes and advancing bilateral cooperation. It could include efforts to strike a quick trade deal to avoid a transatlantic trade war, finalize the Global Arrangement on Sustainable Steel and Aluminum, conclude critical minerals agreements, reduce trade costs by expanding conformity assessments, improve transatlantic risk assessments, and ensure that new EU laws such as the Digital Markets Act do not privilege Chinese and Russian tech over US firms. NATO allies should invoke Article 2 of the North Atlantic Treaty to promote defense-related innovation, and enhance screening of foreign investment in security-related infrastructure, companies, and technologies.

Pillar Two would address the China challenge: extending sanctions on Chinese actors for supporting Russia’s war efforts; improving and expanding coordination on export controls; restricting data flows to China, Russia, and other countries of concern; sharing information on nonmarket policies affecting digital trade; and improving inbound and outbound investment screening. 

Pillar Three would include areas in which the US and the EU could address China-related issues by working with like-minded partners. These include strengthening and expanding cooperation on critical minerals, energy security and climate change; coordinating and enhancing efforts to counter Chinese theft of intellectual property; supporting the use of trusted vendors in digital technologies; reviving and expanding US-EU-Japanese talks on nonmarket economies; and promoting a “Free Road Initiative” to help allies develop more secure and resilient connectivity options. 

It is an ambitious agenda. Any effort to forge joint or complementary US-European approaches to China could be a bridge too far. Yet the high stakes warrant exploring what a transatlantic deal on China might look like.  

To read the full Comprehensive Report, please click here.

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Trump and the Europe-US-China Triangle

The return of Donald Trump to the White House represents a multi-dimensional challenge for Europe, with major implications for transatlantic relations, Europe’s relationship with China, and broader G7 unity.

The return of Donald Trump to the White House represents a multi-dimensional challenge for Europe. Trump is promising to hit European countries with broad-based tariffs, curtail US support for Ukraine, and seek sharp increases in European defense spending. Elon Musk’s support of European far-right parties and an emerging alliance between Trump and US tech firms is likely to further test Europe’s resilience and unity. European leaders are scrambling to minimize the damage. Several have met with Trump since his election victory to warn against a bad peace deal for Ukraine. Meanwhile, the European Commission has prepared a welcome package for the Trump team in the hope of heading off a transatlantic trade conflict. How the standoff plays out will have major implications for transatlantic relations, Europe’s relationship with China, and broader G7 unity in the face of mounting economic and security challenges coming from Beijing.

Déjà vu

“Trade wars are good, and easy to win,” Donald Trump tweeted in March 2018, as he unveiled plans to impose tariffs on US imports of steel and aluminum on national security grounds. Later that month, his administration followed through with tariffs of 25% on steel and 10% on aluminum. The move prompted the European Union to retaliate with tariffs of its own, file a complaint against the US at the WTO, and introduce safeguard measures to shield its own steel producers. The US steel and aluminum tariffs and EU countermeasures would remain in place for the remainder of Trump’s first term, weighing on transatlantic relations. They came against a backdrop of transatlantic sparring on a range of other trade and financial issues, from the long-running subsidies dispute between Airbus and Boeing to EU member state plans to introduce a digital services tax that would hit US tech firms. Trump’s threats to retaliate against the digital tax plans were the inspiration for the EU’s anti-coercion instrument.

Still, threats by the Trump administration to impose tariffs on European cars never came to fruition. During a visit to the White House in July 2018, Jean-Claude Juncker, then president of the European Commission, was able to avert car tariffs and diffuse trade tensions with promises to ramp up purchases of US soybeans and energy products, and by making clear that the EU would retaliate forcefully against any new US tariffs. This seven-year-old episode has provided European leaders with a glimmer of hope as they scramble to prevent a new transatlantic trade conflict under a second Trump administration that they hoped would never come. They have their work cut out for them. During the 2024 US election campaign, Trump promised to impose across-the-board tariffs of 10-20% on all US trading partners except China (which he threatened with even higher tariffs of 60%). Close Trump aides have warned in private and public forums in recent months that Europe is likely to be hit hard. Since his victory in November, Trump has shown few signs of backing down from his threats. Last month, he described trade relations with Europe as a “disgrace” and accused the bloc of refusing to buy any American goods. In reality, US goods exports to the EU hit a record high of $370 billion in 2023. But that did not prevent the US goods trade deficit with the EU from rising to $220 billion in that year, up from about $160 billion in 2017, when Trump’s first term started.

Trump’s grievances against Europe do not end with trade. He has railed against European countries for failing to meet commitments made at a NATO summit in 2014 to increase their defense spending to 2% of GDP. Seven EU countries failed to hit that threshold in 2024, and many more achieved the goal only thanks to a late spending push fueled in part by a desire to avoid Trump’s wrath. A more immediate concern in Europe surrounds Trump’s commitment to Ukraine. He has criticized the outgoing Biden administration for providing billions of dollars in financial and military support for Kyiv, questioned the efficacy of US sanctions against Russia, and promised to end the three-year-old war in a single day. With a war raging on its eastern border, Europe’s reliance on US security guarantees gives Trump significant leverage that is likely to color the EU’s response to any US trade measures.

On top of this, messages from Trump and his entourage over the past weeks suggest Europe may face a more fundamental challenge from the new administration. Trump has expressed a desire to secure US control of Greenland, an autonomous territory of EU member state Denmark, refusing to rule out the use of military force or economic coercion to secure the island. His political ally, advisor, and financial backer Elon Musk has injected himself into European politics by actively supporting the far-right Alternative for Germany (AfD) party in the run-up to a February election and by calling for the resignation of UK Prime Minister Keir Starmer.

Compared to Trump’s first term, the EU enters 2025 in a more vulnerable position. The bloc has barely grown for the past two years and it faces an increasingly aggressive Russia, which is making gains in Ukraine, thanks in part to support from China. However, the EU is also arguably better prepared for Trump than it was eight years ago, when his victory surprised many and his policies and governing style were not well understood. The EU in 2025 is more pragmatic and transactional compared to 2017. To avoid a trade war, safeguard NATO, and ensure that a bad peace deal is not forced on Ukraine, many European countries are prepared to make commitments to the new administration that would have been unthinkable in Trump’s first term.

The EU’s offer to Trump

It is no secret that many EU leaders, including those in the top positions at EU institutions in Brussels, were hoping for a Kamala Harris victory on November 5. But they also set about preparing for their worst-case scenario, creating a dedicated transatlantic taskforce under returning European Commission President Ursula von der Leyen and cobbling together a “welcome package” for the new US president with three main components: trade, China, and security (Table 1). There have been several high-level meetings between European leaders and Trump since his victory in November, including one with France’s Emmanuel Macron in Paris and with Italy’s Giorgia Meloni at Trump’s Mar-a-Lago retreat in Florida.

While Ukraine was discussed, it is unclear whether Macron and Meloni were able to delve into detail on the tariffs with Trump. Neither has there been a substantive, high-level conversation between the leaders of EU institutions and Trump in recent months, raising questions about whether the Commission has been able to fully present its package to the president-elect and his team before he enters the White House on January 20. Von der Leyen, notably, spent a week in the hospital with severe pneumonia in early January, hindering plans by her team to meet with Trump before his return to the White House.

Though not included in the package, surely one of Trump’s key demands will be an end to an array of EU cases against big US tech firms like Amazon, Apple, Google, Meta, and X that have resulted in investigations and billions of euros in penalties for offenses ranging from unpaid taxes and content moderation failures to anti-trust and data privacy violations. In early January, days after announcing an end to Meta’s third-party fact checking program, founder Mark Zuckerberg made clear that he hoped to enlist Trump’s support in pushing back against European policies that impose stricter limits on his company. The Commission is reportedly reassessing investigations launched last March against Apple, Meta, and Google under its Digital Markets Act (DMA) in a sign that it may consider scaling back those probes. But it will face pressure from member states to enforce rules contained in the DMA and the Digital Services Act, which obliges platforms to police online content or face fines.

Besides the obstacles to an amicable resolution of the transatlantic digital divide, there are two important problems with the EU’s offer. First, the EU has few indications from the incoming US president, or from members of his team, that he is prepared to ditch his tariff pledge in exchange for European concessions. Trump suggested in a social media post in late December that EU purchases of US oil and gas might be enough to avert a trade conflict. But there have been no other public clues about his readiness to negotiate. And given Trump’s history of railing against Europe, it is unlikely that the tariffs are merely an attempt to build up leverage.

Europe’s message that a transatlantic trade conflict would suck EU resources away from China is likely to fall on deaf ears. Many of the officials in Trump’s orbit believe that Europe will be forced to align with the US on China regardless, because of US long-arm measures (for example on export controls) or because the EU will have no other choice than to raise trade barriers once US tariffs are imposed on China, to prevent Chinese exports from being diverted into Europe and decimating European industries.

Second, member states have not endorsed the Commission’s offer. The hope in Brussels is that Berlin, Paris, and other capitals would swing behind it if the Trump team were to signal that it is open to a deal. But elements of the “package” are highly contentious in some European capitals, especially those that involve China policy. The outgoing and (most likely) incoming government in Germany, for example, is opposed to tariffs as a tool to protect European industry against Chinese exports, due to a combination of free-trade fundamentalism and fear of Chinese retaliation. There is also resistance in European member states that produce advanced technologies, for example the Netherlands, to more wide-ranging export controls that would further limit sales to China. Countries like Hungary and Slovakia that have cultivated close ties with China will resist any attempts to condition Chinese investments in Europe or impose restrictions on Chinese technology in connected vehicles.

Three scenarios

We see three main scenarios for how transatlantic relations could develop in 2025, each with different implications for EU policy toward China. We believe the chances are slim that the EU can avert US tariffs altogether. We also believe the Trump administration is likely to take a more targeted and phased-in approach to imposing tariffs on US trading partners (including China) than he promised during the election campaign, out of concern about the impact on the US economy and inflation of a “big bang” approach.

A sharp increase in EU defense spending appears to be baked in. The endgame for Ukraine is much harder to predict, although there have been signs recently that Trump is ready to abandon the unrealistic 24-hour timeline for a peace deal that he floated during the election campaign.

Finally, we believe the likelihood of a détente between the EU and China is low, regardless of how transatlantic relations develop. Trump is likely to increase tariffs on China sharply (even if 60% tariffs from day one look unlikely). This will divert Chinese exports to Europe, forcing Brussels to respond with more robust trade defense measures of its own. That will deepen trade tensions between the EU and China, even if some member states might seek to limit the damage to their economies by sidestepping Brussels and seeking an accommodation with Beijing.

Grand bargain (10% chance)

The best-case scenario for Europe would be Trump embracing a deal with the Commission that leads him to withhold tariffs altogether (or impose tariffs that are far more limited than what he promised during the campaign) in exchange for commitments by EU member states to make significant purchases of US goods, spend more on defense (including support of Ukraine), and toughen up on China.

Under this scenario, a bad peace deal that plays into Russia’s hands and is made over the heads of Kyiv and Europe would be avoided and clashes over election interference and digital policy would be kept under wraps. EU member states would embrace a deal with Trump because it would avert hard-hitting US tariffs and ensure a continued (if diminished) security role for the US in Europe.

This would give European Commission President Ursula von der Leyen leeway to pursue an accelerated de-risking agenda vis á vis China—despite ongoing reluctance among member states, notably on the economic security front. The Commission would make aggressive use of its trade defense tools against China, including the imposition of safeguards and roll out of new cases under the Foreign Subsidies Regulation. The EU would pursue closer alignment with Washington’s own export control regime, and the debate over outbound screening and restricting connected vehicle technology from China would shift into higher gear.

Despite accelerated transatlantic convergence on China policy, coordination between Washington and European capitals would remain bumpy, with the Trump administration showing little patience with Europe and favoring pressure tactics over dialogue, and with threats to impose unilateral measures to force faster EU alignment. Yet coordination would be better than in other scenarios, paving the way for joint action on several fronts.

In contrast, relations between the EU and China would deteriorate quickly, with Beijing retaliating against EU countries and firms with tit-for-tat tariffs, export controls on critical raw materials, the targeting of EU firms in China, and state-sponsored consumer boycotts or targeted investigations.

Managed mess (70% chance)

Our base case scenario foresees Trump re-introducing the steel and aluminum tariffs from his first term and imposing additional tariffs on EU member states that are either targeted or at the low end of expectations.

The EU would almost certainly respond by reimposing its rebalancing tariffs and introducing targeted new tariffs on US products. This tit-for-tat would cast a cloud over transatlantic relations, especially as US tariffs would deepen Europe’s economic woes. But both sides would agree to refrain from further escalation.

In this scenario, one can envision Trump paring back US military and financial support for Ukraine, insisting on a ceasefire and a significant European role in monitoring it. EU countries would be compelled to ramp up defense spending and support for Ukraine. Yet, a complete transatlantic breakdown could be averted if Trump kept Kyiv and European capitals involved in negotiations and committed to ongoing but limited US military support. The EU could take symbolic steps to limit its penalties against US tech firms without fundamental changes to its policies. Elon Musk’s forays into European politics would continue but at a low simmer.

Despite heightened US-EU tensions, we would not see a meaningful improvement in EU-China relations. Instead, a dual-track China policy would emerge. The Commission would continue to push its tough-on-China agenda in areas where it had authority, for example trade defense and level playing field tools. At the same time, divisions over China policy would deepen within the EU, with a group of countries—from Germany, Austria, Hungary, and Slovakia to Spain and Portugal—pushing back against more drastic EU measures and shooting down the EU’s economic security agenda.

In the absence of a US-EU truce, von der Leyen would lack the political capital to push for closer alignment with the US on export controls, outbound screening, and connected vehicles. Individual countries might seek to reduce tensions and preserve economic ties with Beijing as growth concerns mounted, further weakening the Commission’s position and impeding the emergence of an EU consensus on China policy. Against this backdrop, transatlantic cooperation on China would likely become increasingly challenging, with the US resorting to unilateral measures to try to force alignment. Divisions over China and US policy would become a severe test for the EU.

Perfect storm (20% chance)

This scenario foresees a more fundamental breakdown of transatlantic relations driven by wide-ranging US tariffs against Europe, an accelerated withdrawal of US security guarantees and support for Ukraine, and active interference by the Trump administration in European politics.

Within days of taking office, Trump could decide to impose across-the-board tariffs on the EU at the higher end of the 10-20% range promised during the election campaign. He could also reinstate Section 232 steel and aluminum tariffs and threaten to introduce Section 301 tariffs in response to digital services taxes pursued by European member states. The EU could respond with wide-ranging tariffs on US products, setting the stage for a major transatlantic trade war.

Trump could set a tight deadline for ending US military and financial support for Ukraine, insist on a ceasefire that gives Russia control over Ukrainian territory it controls, and refuse to allow US troops to help monitor the ceasefire. Cooperation within NATO and the G7 would become increasingly challenging and transatlantic dialogue on China would break down, with the US increasingly using unilateral measures to try to force EU alignment.

Compounded by continued interference in European politics and policymaking, especially in the digital sphere, anti-US sentiment would spread as Trump was blamed for deepening Europe’s economic woes and poisoning the European political debate. There would be high potential for EU divisions, with member states pursuing different agendas vis à vis the US, Russia, and China. Commission trade defense resources would shift away from China to focus on the US, leaving less capacity to manage economic spillovers from China.

Within the EU, political pushback against tough-on-China policies would spread, leading Brussels to try to dampen down tensions. Although trade and security relations would likely remain strained (with China’s continued support for Russia a major burden on the relationship), the EU could adopt a more transactional approach, looking for a negotiated solution to the rising tide of Chinese imports and ways to bring back a more positive bilateral agenda (like cooperation on the green transition and certain technological fields) in exchange for commitments by Beijing on market access and promises to use its influence with Russia.

Signs that the US and China were pursuing a follow-up to their “phase one” deal could also trigger a more conciliatory EU approach to Beijing. Conversely, deepening economic woes in China resulting from US tariffs could leave Beijing more open to making token concessions to Europe to preserve market access.

European leadership test

The return of Donald Trump presents a massive challenge for Europe’s security, economy, and liberal democratic values that continue to guide policy in the 27-nation bloc—even if they are increasingly under threat. Trump’s second term as president is likely to upset long-held assumptions about the transatlantic relationship, multilateral groupings like the G7 and NATO, and the broader US-led international order that has existed since World War Two.

While we believe transatlantic accommodation is possible, there is a greater likelihood that ties will be characterized by friction and confrontation in the economic and security realms. The more aggressive the Trump administration is with Europe, the greater the risk that divisions within the EU widen, and the greater the temptation will be for Europe—especially its member states—to seek some sort of accommodation with Beijing. We would not rule out a gradual pivot towards a more transactional EU approach to China that leaves the door open to more economic cooperation, for example through managed trade agreements.

Nevertheless, we view the chances of a meaningful EU-China détente as slim. Even in a “perfect storm” for transatlantic relations, the EU will be scrambling to shield itself from Chinese exports diverted to the European market because of a sharp increase in US tariffs on China. Under all three scenarios, the EU could resort to greater trade defense tools to restrict the inflow of Chinese imports and shield European industry in a more systemic way. Other aspects of the EU agenda on China, however, are likely to suffer if transatlantic ties grow increasingly confrontational. For example, the Commission’s economic security agenda—which foresees a more restrictive approach to export controls, inbound and outbound investment screening, and connected vehicles—will face even greater hurdles if the European economy is being hit by US tariffs.

The hit to the European economy is most acute in a “perfect storm” scenario but could also be severe under a “managed mess,” or even under a “grand bargain” if China retaliates forcefully against the EU for working closely with Washington. This would have knock-on effects on EU politics, potentially boosting populist fringe parties, and on EU unity, with member states pursuing their own agendas and undermining EU institutions.

In the past, major disruptions or crises have led to leaps forward in EU integration. However, at a time of increasing polarization, political uncertainty in large member states like Germany and France, and a potential breakdown of the post-war alliance with Washington, will a crisis be sufficient to force policy consensus within the EU and push the bloc toward a collective goal? For this, bolder leadership and vision will be required, particularly in big capitals like Berlin and Paris.

To read the research as it was published on the Rhodium Group website, click here.

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Tariffs and Economic Isolationism: Four Principles for a Response

The incoming Trump administration promises a very large increase in tariffs, perhaps to levels last seen during the mid-1930s in the Depression. As national policy, this would abandon the liberalizing program developed during the New Deal and extended under presidents of both parties all the way through the Obama administration. In its place would come something like the high-tariff worlds of Harding/Hoover isolationism in the 1920s, or (in Mr. Trump’s apparently preferred formulation) the even more remote Gilded Age of the 1880s and 1890s.

Just a week before the inauguration, in the real world of 2025, what will actually happen — to borrow from lyrics from a slightly later era — still ain’t exactly clear. Mr. Trump has proposed at least five different policies, mostly incompatible. One is an overall 10% or 20% tariff — the most Hoover-like option, with tariffs as much as ten times their current rate. Another is the imposition of tariffs on particular countries as tools for particular issues such as migration, and a third is stopping trade with China, Canada, and Mexico in particular. Last year’s Republican platform added a “Rube Goldberg”-style scheme in which each U.S. tariff line is equal to or higher than every analogous tariff line in every other country, and the tariff schedule balloons out to millions of lines; another option is traditional, Hoover-era tariff legislation. The most recent, via press trial balloons, is tariffs on products administration officials decide are especially sensitive. 

Tariffs are occasionally necessary, of course. Governments can use them appropriately to give industries struggling with import surges or subsidized competition space to recover (as the Biden administration did last year with respect to Chinese-produced electric vehicles), or to isolate aggressor governments as with the punitive tariffs imposed on Russia in 2022. But they always raise costs — a strange choice for Mr. Trump to make, after the advantages his campaign drew from the inflation burst of 2021-2023 — and, in general, tend to lower living standards and erode industrial competitiveness. Depending on the way the incoming administration tries to impose them, they can also harm the separation of powers and the Constitution. And looking ahead, the Biden administration’s experience demonstrates the error of trying to answer by blurring differences or proposing “lite” versions of the same thing.

This doesn’t mean critics need a very detailed response now. That isn’t necessary until the administration program becomes clear. But they do need to lay the intellectual foundation for it soon. Here, then, are four principles, meant to bridge the Constitutional, economic, strategic, and political issues the various Trump proposals raise: 

Defend the Constitution and oppose attempts to rule by decrees.
Connect tariff policy, both as taxation and trade policy, to growth, work, prices and family budgets, and living standards.
Stand by America’s neighbors and allies.
Offer a positive alternative.

I. MOVING BEYOND BIDENOMICS

In applying these principles, there’s no need for Democrats — or liberals in general, or others concerned about living standards, competitiveness, and America’s place in the world — to feel bound by Bidenomics. To the contrary, a new agenda needs some clear breaks with it.

President Biden’s program had some very positive results: low unemployment, steady growth, and faster decarbonization. Its “industrial strategy” programs, if expensive, do seem to have strengthened the semiconductor industry and might still prove durable ways to reduce emissions in automobiles and power plants. The Biden team also leaves some useful trade policy starting points:  Commerce Secretary Raimondo’s innovative export promotion programs, Secretary Yellen’s Treasury concept of “friendshoring” as a way to ensure diverse sourcing and pool allied strengths in a more dangerous world, and Vice President Harris’s campaign summary of a broad tariff increase as fundamentally a tax increase on working families all make sense.

But Bidenomics also had failures and missed opportunities, and ended as a political liability. The White House badly oversold its “industrial strategy” as something that could create a much larger manufacturing sector, as opposed to the very important but less cosmic semiconductor and emissions-reduction plans. (Manufacturing, at 10.9% of GDP before Mr. Trump’s initial round of tariffs in 2018/19, fell to 10.3% by 2021. Its share now, industrial strategy or not, is 10.0%.) In trade policy as in some other areas, Bidenomics missed an opportunity to cut prices for families — obviously, the working-class public’s single largest concern last year — and make sure the first Trump administration bore its appropriate share of blame for inflation, by leaving the 2018/19 tariffs largely untouched and declaring the permanent tariff system untouchable. It stranded the U.S.’ $3 trillion export sector by giving up on lowering foreign trade barriers and promoting digital trade. Most important, as we warned nearly two years ago, its concession of tariff issues to Trump without a fight in 2021-2023 proved a grave political weakness in 2024, leaving Vice President Harris’ valiant campaign without a positive alternative to Trump’s tariff increases.

II. FOUR PRINCIPLES

The coming years require something else. What might it be? Trumpism will be better defined within a few months. Within a few years, any of its various proposals will likely create new problems (or recreate old ones) that require solutions we cannot now define. So, for now, a detailed response would be premature. But as a point of departure, here are four principles meant as a foundation for critiques of Trumpism and the development of alternatives:

1. Defend the Constitution. First, prevent breaches of the separation of powers, and insist that Congress consider any change in tariff policy in a Constitutionally appropriate way. The Constitution’s Article I, Section 8, gives Congress unambiguous authority over “Taxes, Duties, Imposts, and Excises,” and for good reason. No single individual, president or not, should have the power to create his or her own tax system out of nothing. That, at minimum, risks impulsive and ill-considered decisions. Even more seriously, it creates a standing temptation for all future presidents to use tariffs to reward personal friends and supporters, and likewise to punish critics, business rivals, and disaffected states.  

As a legal matter, Congress has passed a number of laws “delegating” tariff policymaking to presidents in certain situations. Some seem Constitutionally sensible and convenient. Others, such as the International Emergency Economic Powers Act and sections 301 and 232 of U.S. trade law, give presidents too much unchecked power. But even in these cases, no law is meant to allow a president to create his own tariff system. Whether or not courts find such a step “unconstitutional,” given precedent from case law and Congressional drafting errors, as an obvious breach of an unambiguous Congressional power, it would certainly be “anti-Constitutional.” Congress should oppose the perversion of any current law for this purpose, insist that no general tariff increase ever occur absent a formal vote, and reject any attempt to impose tariffs by decree.

2. Connect trade and tariff policies to American living standards, work, and growth. Second, define tariff policy correctly as tax and trade policy, and analyze its effects on the basis of its impact on working family living standards, business competitiveness, and growth.

As Laura Duffy explained in her PPI paper last fall, tariffs are a poor form of taxation, distinguished from broader income or consumption taxes for narrow base and high rates, and for opacity, regressivity, and inequity. They are opaque because they are hidden from the consumers who bear their costs — one reason PPI and other polling tend to find tariffs a low-priority issue (pro or con) among working-class families. They are regressive because, in their role as a form of sales tax, they tax only goods, and less affluent families spend twice as much of their income on goods — clothes, shoes, cars, toothbrushes, Band-Aids, food, rugs, TVs, chairs — as rich families. Even today, tariffs account for a quarter of the cost of cheap shoes, and add 10% to the price of mass-market stainless steel forks and spoons. Adding another 10% or 20% tariff, or whatever the actual Trump administration policy turns out to be, to this adds immediately to their cash-register prices. A tariff increase, therefore, presages not only higher prices in the abstract — but higher prices mostly on things important to hourly-wage families. (And remember the Trump platform’s top single promise last year: “restore price stability, and quickly bring down prices”). And they are inequitable for businesses as well as families, since they tax goods-using industries — manufacturers, farmers, building contractors, retail outlets, restaurants — but not services- and investment-intensive sectors like financial services or real estate.

In trade policy, tariffs do have legitimate policy roles — for example, as part of a program to isolate aggressor governments (as with the removal of Russia’s MFN status in 2022), or giving temporary support to industries facing import surges or competitive troubles, and needing some space to upgrade. But policymakers should reserve tariffs for these kinds of unusual circumstances. The better trade policy approach is to build the export sector — a $3 trillion part of the U.S. economy, leading the world in farming, energy, and services exports, and second in the world for manufacturing — and find ways to promote it. Exporters pay high wages and earn a fifth of all U.S. farm income; they are disproportionately successful manufacturers, lead the world in cutting-edge innovation from digital technology to biotech, and range from world-famous medicine and aerospace firms to small chocolatiers and specialized musical-instrument makers. All are easy targets for the foreign governments who will retaliate against U.S. tariff hikes and breach of agreements. These are national assets, and policy should encourage their success, rather than turning them into trade war cannon fodder.

3. Stand by America’s allies and neighbors: Third, protect and build, rather than disrupt and erode, America’s strategic relationships with allies and neighbors. The U.S. is rare among historic world powers to have both long-term alliances with most of the world’s advanced economies, and deep and friendly ties with its immediate neighbors. These are strategic assets built over decades and core elements of any serious economic or national security strategy for the next decades. 

So it is especially disturbing to see Mr. Trump use his free time in these transition months to pick fights, including through tariff threats, with neighbors and allies from Canada and Denmark to Mexico and Panama. Economics apart, these countries have often stood with the U.S. when it counted a lot. Remember, for example, that Denmark, with its 6 million people and 21,000 military personnel, lost 43 soldiers not so long ago in Iraq and Afghanistan. Canada lost 158. Neither deserves repayment with bullying and economic threats. Certainly, difficult policy issues and disputes turn up at times in alliance and big-neighbor relationships — military spending, export controls, border issues, narcotics control — are all important topics on which the U.S. has legitimate interests, and sometimes disagreements. But to think you can solve any of them more easily by alienating the relevant governments and publics is arrogant. And to forget the very large value we draw from mutually beneficial trade, technological partnerships, and cross-border investment with allies and neighbors is self-destructive folly. Democrats should stand by our alliances and good-neighbor relationships as major national strengths, even if the incoming administration hasn’t yet learned their value.

4. Provide a positive, reformist, alternative: Fourth, define the outlines of a better trade approach. Though a very detailed program is premature, three lines of policy can form a basic vision that offers both household and national benefit:

International engagement: Pool strengths and deepen ties with neighbors and allies through updated, reciprocal trade agreements. Trade negotiations and agreements can help both find non-inflationary sources of growth by expanding markets for America’s exporting factories, farmers, energy, and services industries, and diversity and secure supply chains by deepening relationships with neighbors and allies. This can include U.S.-Europe agreements with the United Kingdom as an immediate choice, a return to the 15-country Trans-Pacific Partnership — now functioning very well as the “CPTPP” for Japan, Australia, and other allies, including the U.K. — and using the 2026 “review” of the “USMCA” to broaden it to Caribbean, Central, and South American countries. The content of such agreements would change in some ways from the FTAs negotiated in the 2000s — probably, for example, through coordination of export control policies vis-à-vis authoritarian countries, joint approaches to Chinese over-capacity, and subsidies in some industries, energy and LNG supply to Europe and Asia, secure access to and joint development of critical minerals and other essential industrial inputs, and other matters — but would remain in the internationalist strategic tradition.
Domestic reform: Lower costs for families and industry. Balancing this outward-looking, optimistic approach to negotiations, move on from defending Constitutional government to restoring it, and from opposing regressive tariff hikes to developing a new approach that makes trade policy fairer and cuts costs for families. At a more personal level, Congress can ease the cost of living by reforming the permanent tariff system, stripping regressivity and sexism out of the clothing, silverware, shoe, and other consumer goods schedules — where hundreds of lines simply raise the prices of cheap mass-market goods not made in the U.S. for decades, and the higher rates imposed on women’s clothes as opposed to men’s extracts $2.5 billion from women each year — and making the functioning of this system transparent. Here the starting point is the Pink Tariffs Study Act introduced last spring by Representatives Lizzie Fletcher and Brittany Pettersen. 
Protect the Constitution: Finally, ensure Constitutionally appropriate policymaking by safeguarding Congress’ control over tariff rates.  Here, the starting point is the Prevent Tariff Abuse bill introduced by Representatives Suzanne DelBene and Don Beyer, which bars the use of tariffs through the International Emergency Economic Powers Act.

CONCLUSION

These are of course starting points and principles meant as guidelines for a period of uncertainty and flux. They identify areas in which policymaking needs to be strengthened and guarded against abuse, new threats and destructive ideas to oppose, and lines of policy that can help families stretch their budgets, strengthen U.S. industries, and safeguard America’s place in the world.

In trade as in some other matters, the Trump administration is taking office next week with a variety of incompatible promises, threats, Hooverist rhetoric, and eccentric references to the late President William McKinley. This means the next years may create new challenges that analysts can intelligently guess at but can’t predict with real precision, and a detailed response will have to. But though even a week before the inauguration, its program ain’t exactly clear, two things do seem certain:

One, Mr. Trump’s tariff threats — whichever among them proves to be the “real” policy — are bad ideas. All of them, though in different ways, would leave Americans with lower living standards, higher-cost and less competitive businesses, and eroded national security.

Two, critics of these threats should not repeat the Biden administration’s attempts to blur differences with Trumpism and propose softer versions of it. Instead, they need a forthright critique and an alternative that can deliver the opposite of Trumpism: a lower cost of living, more competitive agriculture and industries, and a stronger position in a more dangerous world.

PPI-Principles-for-Trump-Tariffs

To read the publication as it was published on the Progressive Policy Institute website, click here.

To read the full publication PDF, click here.

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Global Risks Report 2025

The Global Risks Report 2025 presents the findings of the Global Risks Perception Survey 2024- 2025 (GRPS), which captures insights from over 900 experts worldwide. The report analyses global risks through three timeframes to support decision- makers in balancing current crises and longer-term priorities. Chapter 1 explores current or immediate- term (in 2025) and short- to medium-term1 (to 2027) risks, and Chapter 2 focuses on the risks emerging in the long term (to 2035). The report considers not only the survey findings and the range of implications, but also provides six in-depth analyses of selected risk themes.

Below are the key findings of the report, in which we compare the risk outlooks across the three time horizons.

Declining optimism

As we enter 2025, the global outlook is increasingly fractured across geopolitical, environmental, societal, economic and technological domains.

Over the last year we have witnessed the expansion and escalation of conflicts, a multitude of extreme weather events amplified by climate change, widespread societal and political polarization, and continued technological advancements accelerating the spread of false or misleading information.

Optimism is limited as the danger of miscalculation or misjudgment by political and military actors is high. We seem to be living in one of the most divided times since the Cold War, and this is reflected in the results of the GRPS, which reveal a bleak outlook across all three time horizons – current, short-term and long-term.

A majority of respondents (52%) anticipate an unsettled global outlook over the short term (next two years), a similar proportion to last year. Another 31% expect turbulence and 5% a stormy outlook. Adding together these three categories of responses shows a combined four percentage point increase from last year, indicating a heightened pessimistic outlook for the world to 2027.

Compared to this two-year outlook, the landscape deteriorates over the 10-year timeframe, with 62% of respondents expecting stormy or turbulent times. This long-term outlook has remained similar to the survey results last year, in terms of its level of negativity, reflecting respondent skepticism that current societal mechanisms and governing institutions are capable of navigating and mending the fragility generated by the risks we face today.

Deepening geopolitical and geoeconomic tensions

Comparing this year’s findings for the world in 2025 with the two-year risk outlook provided by the GRPS two years ago shows how far perceptions have darkened when it comes to perceptions have darkened when it comes to conflict. State-based armed conflict, now ranked as the #1 current risk by 23% of respondents, was overlooked as a leading two-year risk two years ago.

In a world that has seen an increasing number of armed conflicts over the last decade, national security considerations are starting to dominate government agendas. Section 1.3: “Geopolitical recession” dives deep into the dangers of unilateralism taking hold in national security considerations and highlights the worsening humanitarian impacts of the ongoing conflicts.

The risk of further destabilizing consequences following Russia’s invasion of Ukraine, as well as in the Middle East and in Sudan are likely to be amplifying respondents’ concerns beyond 2025 as well. In the two-year outlook, State-based armed conflict has moved up from #5 to #3 since our GRPS 2023-24.

Section 1.4: Supercharged economic tensions

Explores how global geoeconomic tensions could unfold. The rise in the two-year ranking of Geoeconomic confrontation, from #14 last year to #9 today reflects unease about the path ahead for global economic relations. The role of technology in geopolitical tensions also concerns respondents, with Cyber espionage and warfare ranked #5 in the two-year outlook.

However, the top risk in 2027 is Misinformation and disinformation, for the second year in a row. There are many ways in which a proliferation of false or misleading content is complicating the geopolitical environment. It is a leading mechanism for foreign entities to affect voter intentions; it can sow doubt among the general public worldwide about what is happening in conflict zones; or it can be used to tarnish the image of products or services from another country.

A growing sense of societal fragmentation

Societal fractures are central to the overall risks landscape, as shown in the risk interconnections map. Inequality (wealth, income) is perceived as the most central risk of all, playing a significant role in both triggering and being influenced by other risks. It is contributing to weakening trust and diminishing our collective sense of shared values.

As well as Inequality, other societal risks also feature in the top 10 of the two-year ranking: Societal polarization, Involuntary migration or displacement and Erosion of human rights and/ or civic freedoms. The importance ascribed to this set of societal risks by respondents suggests that social stability will be fragile over the next two years.

Respondent concern around certain key economic risks – Economic downturn and Inflation – has subsided since last year, with these two risks witnessing the largest falls in the two-year ranking. Nonetheless, the impacts of the cost- of-living crisis since 2022 contributed to Inequality becoming the top interconnected risk this year: Economic downturn, Inflation, and Debt were selected among the top causes of Inequality by GRPS respondents.

Although there are fewer societal risks in the top 10 of the 10-year risk ranking than in the top 10 of the two-year risk ranking (two compared to four), the profound societal fractures that feature prominently in this report should not be perceived as solely short-term risks. Looking ahead to the next decade, Inequality and Societal polarization continue to feature among the top 10 risks. This is an important pair of risks to watch, given how related they can be to bouts of social instability, and in turn to domestic political and to geostrategic volatility. In super-ageing societies – such as Japan, South Korea, Italy or Germany – unfavourable demographic trends could accentuate these risks over the next 10 years. Pensions crises and labour shortages in the long-term care sector are likely to become acute and widespread problems in super-ageing societies, with no easy fix for governments. Section 2.5: Super-ageing societies explores this risk theme.

Environmental risks – from long- term concern to urgent reality

The impacts of environmental risks have worsened in intensity and frequency since the Global Risks Report was launched in 2006, as discussed in depth in Section 2.6: Looking back: 20 years of the Global Risks Report. Moreover, the outlook for environmental risks over the next decade is alarming – while all 33 risks in the GRPS are expected to worsen in severity from the two-year to the 10-year time horizon, environmental risks present the most significant deterioration.

Extreme weather events are anticipated to become even more of a concern than they already are, with this risk being top ranked in the 10-year risk list for the second year running. Biodiversity loss and ecosystem collapse ranks #2 over the 10-year horizon, with a significant deterioration compared to its two-year ranking.

The GRPS shows generational divergence when it comes to risk perceptions related to environmental issues, with younger survey respondents being more concerned about this over the next 10 years than older age groups. Take Pollution, for example, which the under 30s rank as the #3 most severe risk in 2035, the highest of any age group surveyed.

As noted in last year’s Global Risks Report, there is also divergence in how Pollution is ranked by stakeholder, with the public sector placing Pollution as a top 10 risk in the 10-year ranking, but not the private sector. Section 2.3: Pollution at a crossroads aims to fill awareness gaps by exploring under-appreciated pollutant risks that need to become more prominent in policy agendas by 2035 – and ideally much sooner given their significant impacts on health and ecosystems.

Technological risks – still “under the radar”

In a year that has seen considerable experimentation by companies and individuals in making the best use of AI tools, concerns about Adverse outcomes of AI technologies are low in the risk ranking on a two-year outlook. However, complacency around the risks of such technologies should be avoided given the fast-paced nature of change in the field of AI and its increasing ubiquity. Indeed, Adverse outcomes of AI technologies is one of the risks that climbs the most in the 10-year risk ranking compared to the two-year risk ranking. In this report we highlight the role of Generative AI (GenAI) in producing false or misleading content at scale, and how that relates to societal polarization. Section 1.5: Technology and polarization explores this and the broader risks from greater connectivity, rapid growth in computing power and more powerful AI tools.

Among the areas experiencing the most rapid technological advances is the Biotech sector. Section 2.4: Losing control of biotech? takes an in-depth look at emerging risks in biotech, supercharged by AI. Over a 10-year time horizon, low-probability, high-impact risks exist, including Intrastate violence from biological terrorism and Adverse outcomes of frontier technologies involving accidental or malicious misuse of gene editing technologies, or even of brain-computer interfaces. At the same time, such risks do not diminish the tremendous actual and potential progress for humankind stemming from biotech.

The time to act is now – is consensus possible in a fragmenting world?

Deepening divisions and increasing fragmentation are reshaping international relations and calling into question whether existing structures are equipped to tackle the challenges collectively confronting us. Levels of global cooperation across many areas of geopolitics and humanitarian issues, economic relations, and environmental, societal and technological challenges may reach new lows in the coming years. Key countries appear to be turning inward, focusing on mounting domestic economic or societal concerns, just when they should be seeking to strengthen multilateral ties to confront shared challenges.

When asked about the characteristics of the global political outlook over the next decade, 64% of GRPS respondents believe that we will face a Multipolar or fragmented order, in which middle and great powers contest, set and enforce regional rules and norms. Perceptions in response to this question have changed little compared to last year. The Western-led global order is expected to continue its decline over the next decade but will nonetheless remain an importance locus of power. Alternative power centres are likely to strengthen, not just led by China, but also by key emerging powers, including India and the Gulf states.

The decade ahead will be pivotal as leaders will be confronted with increasingly complex global risks. But to prevent a downward spiral in which citizens worldwide will be worse off than before, ultimately there is no option other than to find avenues for dialogue and collaboration.

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Can Europe Turn the Tables on U.S. Tariffs?

The second presidency of Donald Trump, which will be inaugurated in a few days, poses significant challenges for the European Union (EU), particularly in terms of trade. In her latest study, Nathalie Dezeure, Head of Macro & Financial Institutions Research, considers the EU in a favorable position to negotiate with the United States (as well as with China) on trade issues.

Indeed, given the importance of trade between the two regions, deteriorated trade relations would be detrimental for both, but likely more for the United States than for the EU, especially for the manufactured goods sector. The United States relies on the European Union for 18.3% for its trade in goods, compared to 6.7% for the EU. An analysis of value-added trade somewhat mitigates this data, depending on the sectors.

A position of strength

In the short term, in the face of potential or real American threats, the EU’s ability to speak with one voice on the global stage places it in a strong position regarding international trade. The EU currently has various deterrence mechanisms to defend its interests and bring the United States to the negotiation table, thus avoiding an escalation of coercive measures.

This framework has been strengthened over the past two years with instruments such as the Anti-Coercion Instrument (ACI), the Foreign Subsidies Regulation (FSR), and the International Procurement Instrument (IPI). If negotiations fail, an emergency aid plan will be necessary to support vulnerable sectors and contribute to the economic resilience of the EU.

Building economic resilience

In the long term, a strategic response to more conflictual transatlantic relations appears necessary, as well as the revival of the competitiveness of the European single market through an integrated industrial policy and, finally, a diversification of trade to reduce dependence on the United States and China.

With a market of 450 million inhabitants, rapidly growing trade, and a network of trade agreements that has strengthened in recent years, the EU seems capable of providing a firm response to the United States, while maintaining a resilient relationship. The main risk may well come from the EU itself, with some member states showing a desire for restraint in their response.

How_can_Europe_respond_to_an_increase_in_tariffs_on_American_imports_

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Ten Political Risks for 2025

EXECUTIVE SUMMARY

This report analyzes the ten key risks that could impact the business environment and democratic governance in Mexico in 2025. The analysis is based on Integralia’s methodology, which evaluates each risk’s potential impact and likelihood using quantitative and qualitative indicators. Each risk has a distinct probability of occurrence, which may shift throughout the year.

Most of the risk scenarios are linked to the growing concentration and centralization of power within the federal Executive Branch, as well as the erosion of the system of checks and balances.

2025 is expected to bring heightened political risk, as the lack of effective oversight and accountability mechanisms for government authorities could encourage opacity and arbitrary decision-making.

It is worth noting that President Sheinbaum enjoys high approval ratings, and there is considerable optimism among Mexicans regarding the country’s direction. In this context, the government is likely to prioritize policies that sustain its popularity at the expense of initiatives aimed at fostering long-term economic growth and social development.

In the short term, this undermines the Mexican state’s capacity to capitalize on nearshoring opportunities. In the medium to long term, it erodes the competitiveness of the national economy and its productive potential.

Nine of the ten political risks identified by Integralia in January 2024 materialized. For instance, Morena’s electoral victory that allowed it to approve a constitutional amendment enabling the election of Supreme Court justices by popular vote. Additionally, that Donald Trump’s victory in the U.S. would place Mexico in a vulnerable position.

Throughout the year, Integralia closely collaborates with its clients to monitor each risk scenario, aiming to jointly develop targeted mitigation strategies while identifying and leveraging growth opportunities. For 2025, Integralia has identified the following ten risk scenarios as having the greatest potential impact on the business environment.

TEN POLITICAL RISKS FOR 2025

Economic uncertainty, trade disruptions, diplomatic tensions, and an intensification of the migration crisis emerge as immediate consequences for Mexico of Donald Trump’s return to the White House.

Impact Level: Very high

Likelihood: Very high

A deepening concentration of power undermines certainty for the private sector and the overall business climate, driven by a lack of political balance, the erosion of institutional checks and balances, and the opposition’s weakness.

Impact Level: Very high

Likelihood: High

The spirit of North American economic integration weakens, raising doubts about the viability of the current USMCA framework.




Impact Level: Very high
Likelihood: Medium




Companies face increasing legal vulnerability due to the flawed implementation of the judicial reform and the growing bias and incapacity of judicial authorities to solve legal disputes.

Impact Level: Very high

Likelihood: Medium

The current climate of economic uncertainty persists due to the approval of new reforms pushed forward by President Claudia Sheinbaum that give little consideration to the business sector and other stakeholders. These reforms prioritize political criteria over technical or economic ones in areas such as labor, environmental policy, and bureaucratic matters.

Impact Level: High

Likelihood: Medium

Electoral reforms that eliminate guarantees for free and fair political competition, and which limit the representation of opposition parties, are approved by the ruling coalition.

Impact Level: High

Likelihood: Very high

Investment projects in key sectors such as energy and telecommunications, among others, are put on hold due to the uncertainty created by recently approved constitutional reforms —particularly those on strategic sectors and companies, the judiciary, and the dissolution of autonomous agencies— as well as the stalemate in implementing their corresponding secondary laws.

Impact Level: High

Likelihood: High

Violent confrontations increase as a result of internal fractures in organized crime groups and a strategy to capture high ranking criminals, which hampers the transport of goods on highways and small businesses’ operations in regions with high criminal presence.

Impact Level: High

Likelihood: High

A (bad) tax reform is introduced to boost public revenue —either through a comprehensive overhaul or sector-specific adjustments— as a result of fiscal constraints and the government’s need to fund its priority programs and projects

Impact Level: High

Likelihood: Medium

The operational and planning capabilities of local governments continue to decline, impairing their ability to address local issues and needs (i.e. infrastructure and basic services). This decline stems from corruption, insufficient public resources, unqualified personnel, and increasing centralization of power that discourages local responsibility.

Impact Level: Medium

Likelihood: High

OTHER RELEVANT ISSUES FOR 2025

The risk of a credit downgrade increases in 2025
Pressure intensifies against water-intensive companies
Decline in Pemex production compromises oil revenue and weakens the national industrial sector
The National Housing Institute (Infonavit) invests workers’ resources in low-yield projects
Insufficient electrical supply and blackouts

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The Return of the Trump Tariffs – Navigating the Challenges of Trump’s Return to the White House

President-elect Trump will return to the White House in less than two weeks, on 20 January 2025. He has already announced far-reaching policy changes, particularly in the area of international trade. He plans to impose a wide range of cross-sector tariffs with a particular focus on Chinese goods, but also targeting global imports with “universal tariffs”. This will put further pressure on globally operating business actors that are already dealing with U.S. tariffs, largely maintained under the Biden administration, coupled with a worldwide trend of protectionist trade measures.

The next “episode” of the Trump Tariffs saga is likely to affect various businesses, with some critical sectors such as steel, aluminium and automotive facing particular challenges. In general, the trade agenda pursued by Donald Trump will represent another step back from the principles of barrierless, cooperative and predictable global trade. Globally operating businesses will need to prepare for further cost increases and supply chain disruptions.

Key takeaways

President-elect Trump’s threats to impose tariff hikes should be taken seriously. He is likely to face little (legal) obstacles to impose far-reaching tariffs with significant impacts on global markets.
The planned tariff agenda will have significant implications for the majority of globally operating businesses, with particular impact on those in the automotive, pharmaceuticals, steel and aluminium sectors.
The introduction of the proposed tariff increases is likely to result in significant disruptions to global trade, creating a volatile environment for the private sector.
Businesses should prepare to reassess their risk exposure to the planned tariff agenda. In general, businesses operating on a global scale, particularly those that rely heavily on imported materials or on the United States as a major sales market, will need to keep a close eye on developments over the coming weeks and months in order to address the potential impact on their market access conditions and to identify any possible supply chain disruptions.

What measures are planned and who will likely be most affected?

Donald Trump’s tariff agenda during his second term will most likely build on the measures implemented during his first term and, to a large extent, maintained under the Biden administration.

Recap: Trump Tariffs Episode I

During Donald Trump’s first term tariffs have already been a central element of his trade policy. The introduction of tariffs was presented as a retaliation measure against unfair trade tactics and a way to boost the domestic economy and to reduce the U.S. trade deficit. Also, President Trump saw tariffs as a viable method of exerting pressure on competitors or influencing the policies of other countries.

To achieve this aim, the Trump administration has imposed a series of tariffs on imports of solar panels, washing machines (30-50%), steel (25%) and aluminium (10%) from various countries (including the EU), as well as on most goods from China (affecting more than USD 380 billion worth of trade at the time). The Biden administration has maintained most of the measures against China but has lifted or eased certain tariffs on imports from other countries. For example, it replaced tariffs on steel and aluminium with tariff-rate quotas on imports from the EU, the UK and Japan. With regards to China, however, the Biden administration even imposed additional tariffs on Chinese goods, especially for electric vehicles (“EVs”) (100%), batteries (25%) and semiconductors (50%).

In summary, while the situation has eased for some regions and sectors under the Biden administration, operators with global businesses and supply chains are still experiencing adverse effects, especially due to the existing high U.S. tariffs on Chinese imports. The situation could deteriorate further with an escalation under a second Trump administration.

What measures are to be expected from Trump Tariffs Episode II?

During his campaign, Donald Trump announced that it would swiftly impose a wide range of cross-sector tariffs, including:

Universal tariffs (10%) on imports from all countries
Retaliatory tariffs; i.e. “Relief from Unfair Trade Practices” (up to 60% on Chinese imports)
Reciprocal tariffs (based on the tariff rate difference between the United States and its counterpart)
Specific sectors tariffs (especially vehicles; concrete threats were directed at the Mexican automotive industry)
Specifically targeted countries (e.g. 25% on all imports from Canada and Mexico or 100% on BRICS countries)

It remains unclear to which extent these threats will actually be implemented and how much will be used as a negotiating tactic. However, as President-elect Trump, who has tellingly described himself as the “tariff man” takes office, there is no reason to believe that he will back down on most of his plans. The tariff agenda was a central element of his election campaign and is regarded as a crucial factor in achieving victory in the swing states. It is therefore to be anticipated that tariffs will remain a pivotal policy to pursue U.S. economic interests and put pressure on competitors.

In this light, harsh tariff hikes are particularly likely against China, which the previous Trump administration’s National Security Strategy identified as a “strategic competitor”. The severity of the tariffs will be contingent on various factors, including the influence of advisors. For instance, Elon Musk, who is anticipated to play a pivotal role in Trump’s cabinet and exert influence on the president’s broader political strategy, could be significantly impacted by high tariffs on Chinese goods, due to his deep business ties with China, especially with respect to Tesla.

However, given the United States being one of its largest export market, also the EU and the UK, as traditional “allies” of the United States, will have to prepare for higher tariffs and trade restrictions, as former Trump administration official, Kelly Ann Shaw only recently warned.

This does not mean that the new Trump administration will not also use tariff threats as a means of economic coercion. Rather, in addition to implementing tariffs in order to boost the domestic economy, the Trump administration is also likely to leverage the threat of high tariffs as a bargaining tool to pressure competitors into negotiations on existing or new free trade agreements with more favourable market access terms for the United States. This has already been done during his first term, for example with regard to the United States–Mexico–Canada Agreement (“USMCA”). Furthermore, Trump is likely to not only use tariffs as a means of exerting pressure to secure greater market access, but also employ them as a coercive tactic on a broader range of political issues. Concerning the threat of imposing tariffs of 25% on all goods from Mexico and Canada, Trump has already announced that these measures will be specifically targeted at stopping “illegal migration and drug trafficking”. Similarly, in relation to the threats to the BRICS countries, Trump has indicated his intention to implement tariffs if they weaken the dollar, by creating an alternative currency to the dollar for international trade. In relation to the EU, Trump has only recently linked the imposition of tariffs to a demand that the EU commit to the purchase of “large scale” amounts of oil and gas.

Which sectors will be affected the most?

President-elect Trump’s far-reaching tariff-agenda, if implemented, will have a significant impact on almost all globally operating business sectors. However, some sectors are particularly vulnerable to increasing costs due to the threatened tariff hikes.

Automotive: Donald Trump’s proposed tariffs (whether universal or car-specific) are expected to cause significant impact on the automotive industry, particularly given the United States’ status as the major market for imported passenger vehicles (with an import value of USD 203.6 billion in 2023). The potential decline in U.S. demand due to rising prices is expected to put even more pressure on the automotive sector which is already under financial stress from developing EVs and competition from Chinese manufacturers. German and Mexican car exports to the United States are predicted to be particularly affected, as the United States is their largest import market. In the event Trump follows through on his threat of imposing significantly increased tariffs on Mexican car imports, this will also have knock-on effects on other major car brands with substantial manufacturing operations in Mexico. In general, disruptions in supply chains and investment plans are being expected, potentially leading companies to increase U.S. production or pass costs to consumers.
Electric Vehicles: EVs exported from the EU may face additional hurdles to those faced by the wider automotive sector. The Trump administration could revoke the relief for EU exports under the U.S. Inflation Reduction Act (“IRA”), making it harder for European EVs to qualify for support measures, as a significant segment of the vehicles would not be eligible under the original IRA rules.
Pharmaceutical Products: Pharmaceuticals are on second rank of the most imported good by the U.S. (with an import value of USD 203.2 billion in 2023). The immediate impact of new U.S. tariffs on the pharmaceutical industry is likely to be minimal due to its critical nature and inelastic demand. However, over time, these tariffs and more favourable U.S. regulations could shift investment and production to the United States, especially for highly exporting countries and regions in that sector, such as the EU and UK.
Steel, Aluminium and other Chemicals: Although smaller in total numbers, the steel and aluminium industry is also expected to be affected by the tariff agenda. Under the Biden administration, the EU and the United States reached an agreement to lift most restrictions on aluminium and steel and replace it with tariff-rate quotas; the new Trump administration could revoke these reliefs. Furthermore, the expected tariff hikes against China, the world’s largest producer of steel, are feared to result in a surge of Chinese steel products in other markets. This could result in protective measures being taken by affected markets, which would in turn cause supply chain disruptions and increase costs for those business operators who rely on Chinese steel products. Exporters of chemicals will also be affected. For example, within the EU, the United States is the major market for chemicals (with an import value of EUR 139 billion in 2023).
Fishery: In some regions, particularly the U.K., the fishing industry is predicted to be harshly affected, given that a high share of UK exports of fish products goes to the U.S. Studies fear an export volume decline by 22% in this sector.
Electronics/ Semiconductors: The U.S. is also a major market for electronics and semiconductors. The import value of electrical equipment (including computers) and semiconductors made up 257.9 billion USD in 2023. Furthermore, President Trump has threatened to introduce tariffs on large chip manufacturing countries, which means Taiwan, with the Taiwan Semiconductor Manufacturing Company (“TSMC”) producing 90% of the global most advanced chips. This would represent a shift from the approach of the CHIPS Act, which was implemented under the Biden administration in August 2022. The CHIPS Act was designed to support the U.S. semiconductor manufacturing industry, primarily through subsidies. An introduction of increased tariffs would lead to a rise of chip prices across the global supply chains and possible disruptions due to its general tangled multinational, multi-layered nature.

What are the relevant legal frameworks and implications?

The return of the Trump Tariffs has the potential to have far-reaching implications to various business sectors and global trade in general. This raises questions about the legal framework for imposing such measures and whether the Donald Trump could face legal challenges in the process and, as a result, for their implementation.

The U.S. legal framework

The legal basis for imposing import tariffs in the United States primarily derives from the U.S. Constitution (Article I, Section 8), which grants Congress the power to levy taxes, duties, and imposts. However, Congress has delegated significant tariff authority to the President through various trade laws over time. This delegation allows the President (without the participation of Congress) to impose significant tariffs under certain conditions, particularly related to national security, trade imbalances, or unfair trade practices. While President-elect Trump will have the majority in Congress to potentially obtain sufficient support for further legislative action, these far-reaching powers still remain relevant. Getting new legislation through Congress is a lengthy process, and it may be subject to legal challenges. In order to provide quick results, as announced during his election campaign, it is therefore probable that Trump will utilise the existing legislation to its fullest extent. By doing so, he will not only have the authority to implement tariff measures, despite potential reservations expressed by some Republican Representatives, but will also be able to do so following the mid-term elections, which could result in a change of majority in Congress. It is therefore beneficial to consider the existing legislation and carefully assess the opportunities that its material scope may present for a second Trump administration.

Key U.S. trade laws that grant tariff powers to the President include:

Trade Expansion Act of 1962 (Section 232): Permits the President to adjust tariffs on products that are imported in such quantities or under such circumstances as to threaten national security, as determined by the Department of Commerce.
Trade Act of 1974 (Section 301): Authorizes the President to impose tariffs or trade restrictions if it is determined that foreign countries violate trade agreements or engage in discriminatory practices.
Tariff Act of 1930 (Section 338): Grants the President the authority to impose tariffs in response to discrimination against U.S. products.
International Emergency Economic Powers Act (“IEEPA”) of 1977: Grants the President broad powers to regulate imports if a national emergency is declared, typically linked to national security concerns.

During the first Trump administration, tariffs were implemented under various of these laws, including Section 232 of the Trade Expansion Act of 1962 and Section 301 if the Trade Act of 1974 for tariffs on steel and aluminium, and various Chinese products. Similarly, the Biden administration has continued using these laws to address trade imbalances and national security concerns. Regarding potential new tariffs, Trump could rely on a combination of these laws. While there is debate among U.S. law commentators as to the extent to which these laws could serve as a basis even for the implementation of universal tariffs, it seems not entirely impossible. Both laws require a prior investigation by competent authorities and a link to a national security threat, which seems a doubtful argument to apply to across-sector and region-unspecific imports into the United States. However, during Trump’s first term, legal challenges to the Trump tariffs based on these sections did not result in victory. Rather, the U.S. courts have repeatedly applied a broad interpretation of these rules, allowing the President significant leeway.

The oldest piece of legislation, Section 338 of the Tariff Act of 1930, has not been used for over 70 years. However, as suggested by some advisers of President-elect Trump, it might be revitalised as it does not require any lengthy investigations beforehand, which would allow for the desired swift outcomes. The legislation allows for the implementation of tariffs in response to discrimination against U.S. products, which aligns with the broader narrative of Donald Trump that “all trade is unfair” with respect to U.S. products. Furthermore, the legislation does not include many institutional checks and balances to prevent such a sweeping approach. President-elect Trump could potentially use this legal basis not only for tariffs on Chinese products but also for universal tariffs until the courts review these measures.

Another potentially attractive approach to achieve quick results would be to base tariff measures on the IEEPA. Under this legislation, the declaration of a national emergency would allow for broad, also cross-sector tariff increase. In 2019, Trump considered using the IEEPA to impose tariffs on Mexican goods as a means of deterring illegal migration. However, a deal was ultimately reached before that. While the current legislation has not been used by any of the presidents, its predecessor has been invoked by President Nixon in relation to the Trading with the Enemy Act in 1971 to impose import tariffs, which has been upheld by the U.S. Court of Customs and Patent Appeals. Although the declaration of a national emergency could result in legal challenges, the legislation remains an option to act quickly and to impose far-reaching measures.

Lastly, the most concrete proposal for future legislation was presented in the form of the “Reciprocal Trade Act”. On the basis of that act, President-elect Trump aims to introduce “reciprocal tariffs”, which means that he intends to increase tariffs on imported goods from other countries that apply higher tariffs on the same products imported from the U.S. to an equal level. However, Trump would need to bring this new piece of legislation through the Congress, with uncertain success. Its potential impact on key U.S. sectors, such as agriculture, could influence the stance of even some Republicans.

To sum up, from a U.S. legal standpoint, while especially the implementation of universal tariffs may potentially give rise to legal challenges, overall, Donald Trump is likely to encounter minimal legal obstacles on the path towards reintroducing even far-reaching tariffs, given the extent of authority to act unilaterally granted to the U.S. President under the relevant legislation. The main challenge would be political opposition, both domestically and internationally, especially with regards to reactions following potential breaches of international laws.

Conformity of the measures under international law and potential reactions / counter-measures

The international trade law framework is based on three fundamental principles: freer and fair trade, predictability and non-discrimination. This means that the members of the World Trade Organization (WTO) work together on lowering trade barriers through binding and transparent means. Tariffs are therefore set to binding, maximum levels for individual members achieved through negotiations on mutual concessions for each product. The resulting legally binding commitments on cut and bound tariffs are enshrined in the goods schedules of individual members that are part of the Uruguay Round Agreements. In this process, tariff or trade concessions granted to one member must be extended to all (principle of “most favoured nation (“MFN”) treatment”). Tariff increases are only allowed in narrow exceptions, such as to counteract dumping, illicit subsidy measures or import surges that threaten domestic industries (so-called safeguard measures) or “essential security interests”. Furthermore, changes to tariffs can be negotiated on the basis of Art. XXVIII GATT. In such negotiations, Members concerned “shall endeavour to maintain a general level of reciprocal and mutually advantageous concessions not less favourable to trade” than that provided for prior to such negotiations. Such negotiations have to follow a strict procedure foreseen in the provision, bringing together various negotiating parties, including Members “with whom the concession was originally negotiated” and Members that have a “principal” or a “substantial” supplying interest on the concession. Renegotiations involving multiple tariff lines and numerous trading partners require significant time to complete. During this period, the initiating member cannot unilaterally increase its tariffs. The member must wait until the conclusion of the negotiations, which will result in either an agreement or a disagreement among the parties on the new tariffs. If an agreement is reached, the initiating member can then notify and apply its new MFN tariffs. If no agreement is reached, the initiating member is still permitted to increase its MFN tariffs as desired. However, affected WTO members would then have the right to retaliate by withdrawing substantially equivalent concessions within a six-month window.

All of these principles are threatened by the announced tariff plans of the new Trump administration and the requirements of exceptions or tariff renegotiation procedures are unlikely to be met.

The United States, through multilateral trade agreements, governed by the WTO and 14 bilateral or regional Free Trade Agreements (FTAs), has committed to cut down trade barriers and ensure a predictable trade environment by maintaining tariffs within certain “bound” levels.

During Trump’s first term, various affected WTO members have protested against President Trump’s tariff agenda for unilaterally raising tariffs over the agreed bound levels and challenged the measures in front of the WTO dispute settlement body (“DSB”). While the former U.S. administration argued that the tariffs were a just response to unfair trade and a protection measure for domestic industry, this was mostly rejected by decisions of the DSB. Regarding the tariffs on aluminium and steel, the panels found that the U.S. tariffs violated core principles of WTO law and rejected the invocation of the “national security” exception. Generally, the excessive scope and unlimited application of the tariffs imposed under the first Trump administration was mostly found to conflict with core principles of international trade rules and stood little chance of being justifiable under narrow exceptions available under WTO law.

This assessment is likely to also apply to the even more extensive tariffs, such as the threat of “universal tariffs” against all imports into the United States that the new Trump administration plans to implement. In light of the substantial and timely procedural requirements, as well as the absence of immediate unilateral outcomes, it is highly improbable that Trump will initiate a tariff renegotiation under Art. XXVIII GATT.

In the absence of formal negotiation procedures, also proposals like the introduction of reciprocal tariffs are unlikely to be compatible with WTO law. Different countries have different economic needs and policy priorities as reflected in their different tariff concessions enshrined in relevant goods schedules. This means trade negotiations under the WTO/GATT are based on the principle of first-difference (marginal) reciprocity, i.e. countries trade off increased access to their own markets through tariff cuts in exchange for access to export markets, depending on market value and policy interest. By the way of example, in 2020 the EU reduced tariffs on live and frozen lobsters products at the request of the United States while in turn, the United States reduced its tariffs on a group of products of equivalent value and of interest to the EU (e.g. glassware and ceramics). These concessions were then applied to all WTO members in accordance with the MFN-principle. Raising tariffs on any imported good from a third country to the same level as foreign countries assign tariffs to that specific product would disregard this concept as well as the MFN-principle.

Possible reactions and effects on global markets

In light of the potential violations of WTO law and the rules set out in FTAs, it is likely that affected states will take action in response to the expected second round of Trump Tariffs.

One potential course of action would be to challenge the measures before the DSB. However, given that the WTO dispute settlement mechanism currently lacks a functioning Appellate Body due to the U.S. blockade of reappointing judges, and considering that the United States is not a party to the Multi-Party Interim Arbitration Arrangement (“MPIA”), this approach may not be highly effective. As demonstrated by the legal challenges encountered during the previous term, the adoption of dispute settlement reports that are unfavourable to the United States can simply be circumvented through initiating an appeal process.

Affected countries might therefore resort to unilateral retaliatory measures. For instance, when Trump imposed tariffs on EU steel and aluminium in 2018, the EU responded with its own tariffs, so did Canada, Mexico, Turkey, India, and Russia. China, as one of the most affected countries, also responded with massive retaliatory tariffs, eventually escalating into a trade war.

Without the moderating effect of a fully functioning WTO dispute settlement mechanism, the new tariff threats could lead to a wave of unilateral retaliatory measures from countries worldwide that could result in a full-scale global trade war. Furthermore, major import markets such as the EU may face pressure due to trade diversion. Products previously exported from other countries to the United States could now seek new markets, potentially leading to increased strain on affected domestic industries and the possibility of related protection measures. This effect was already observed during the previous Trump administration. For instance, the EU introduced protective measures against steel and aluminium imports from other countries in response to the last Trump tariffs.

Such an outcome would have a significantly detrimental impact on the overall stability of global markets. At the macroeconomic level, experts anticipate a decline in GDP across all affected countries and regions. A recent study by the London School of Economics indicates that tariffs proposed by President-elect Trump could reduce U.S. GDP by 0.64%, China’s by 0.68%, and the UK’s by 0.14%, while the EU would face a more modest reduction of 0.11%, with Germany being the most affected with a GDP loss of 0.23%. Retaliation measures would worsen the situation even more, experts say. For example, if China retaliates with an increase of its average tariff on US imports by 40 percentage points, the world GDP could drop by 0.56% in 2025, reaching a loss of 1.08% by 2028.

Overall, this environment would lead to a significant increase of costs for manufacturing businesses along their supply chains and reduced investments due to an uncertain market environment, generally cutting the benefits derived from international trade.

In less of a doom-day scenario, affected countries and regions could also couple up in bilateral/ plurilateral trade agreements to circumvent the Trump Tariffs and reduce to overall negative impact on global economy. This approach is also recommended by the majority of economic analysts and observers. Furthermore, as the European Central Bank president, Christine Lagarde, has recently advised for the EU, the approach to a reaction to the tariffs threats should be “not to retaliate, but to negotiate. Regarding the EU, this could for instance take the form of offering to buy more U.S. oil and gas, in an effort to ban remaining Russian gas imports or import U.S. military products to further support Ukraine’s defence against the Russian aggression.

Nevertheless, private business operators will need to prepare for any of these scenarios.

How to prepare and how we can help

The new order of global trade will force companies to reassess their risk-exposure to the effects of the planned tariff agenda. The escalating tensions with China will most likely result in a major disruption of supply chains for business operators relying on the import of Chinese products or having manufacturing branches in China. This could not only drive companies to relocate in order to reduce costs but put on risk new investments with Chinese companies. Generally, globally operating businesses, especially when relying strongly on foreign-sourced materials/ equipment, will have to closely monitor the development of the next months and the potential retaliatory actions. Furthermore, it is probable that the introduction of new tariffs will prompt some countries to renegotiate existing free trade agreements or implement new ones. It will be crucial for business operators to be at the forefront of the developments in order to assess the challenges and benefits potentially arising from new rules that may affect their business sectors.

Our international & EU trade and regulatory practice at Ashurst stands ready to support companies navigating these challenges. We are highly experienced across the full spectrum of international trade law issues including WTO law, free trade agreements, trade policy, trade defence, customs and market access, sanctions and export controls as well as regulatory affairs. Furthermore, our team provides clients with in-depth understanding of the latest legislative and regulatory developments to ensure they stay abreast of policy trends and is therefore best equipped to support clients with any issues arising from the next episode of the Trump Tariffs.

To read the full insight as it was published on the Ashurst website, click here.

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