In terms of the United States’ economic policy, the second administration of President Donald Trump has in part pursued traditional Republican priorities. These include deregulation (e.g., energy, finance) and regulatory measures to support selected sectors (e.g., cryptocurrencies). Uncommon for a Republican administration, it is also pursuing interventionist economic policies in selected sectors, partly flanked by trade-restrictive measures (e.g., rare earths, semiconductors).
Perhaps surprisingly given its concerns about international trade and trade balances, the second Trump administration has largely refrained from making exchange rate policy and dollar valuation an important issue, leaving aside a recent agreement with Switzerland, which, somewhat vaguely, commits Bern and Washington not to set exchange rate targets for competitive purposes.
Donald Trump has repeatedly and sharply criticized the US Federal Reserve, called for drastic interest rate cuts, and even dismissed a member of the Federal Reserve Board of Governors. As far as fiscal policy is concerned, the Republican-led Congress passed the so-called “One Big Beautiful Bill Act” in July. By extending the tax cuts introduced during the first Trump administration, the legislation will lead to continued large fiscal deficits and rising public debt.
The shift of trade policy toward “coercive protectionism” represents the most consequential change in US economic policy under the Trump administration. The policy relies on protectionist measures and threats to exploit the trade dependencies of other countries to extract economic and political concessions.
Meanwhile, the formulation and implementation of US trade policy have often been uncoordinated, apparently guided by the president’s personal whims rather than an institutionalized inter-agency process involving relevant government departments and agencies based on a coherent strategic plan. Trade measures often seem poorly designed regarding their stated objectives. The various bilateral trade agreements that have been negotiated to avoid higher tariffs are insufficiently detailed. Not only the nature but also the haphazard implementation of the Trump trade policy is contributing to the destabilization of the international trade regime.
The Trump administration’s various tariff-based measures on a sectoral, country, and global basis have increased the average effective tariff on imports to the US from 2 percent to nearly 18 percent, a level last seen right after the introduction of the infamous Smoot-Hawley tariffs in the 1930s. The administration has imposed sectoral tariffs (e.g., steel, cars, copper, pharmaceuticals) and a large number of further sectoral restrictions are currently being considered (e.g., semiconductors, rare earths, aircraft, industrial machinery).
In April, Washington announced so-called reciprocal tariffs, which imposed a 10 percent “baseline tariff” on virtually all countries, in addition to a country-specific tariff that was presented as reflecting the bilateral goods trade balance. The volatility in financial markets that the announcement triggered prompted the Trump administration to temporarily suspend the “country-specific” tariff—but not the baseline tariff—until August to allow for the conclusion of bilateral trade agreements. However, many of the trade agreements reached so far have been vague, and it remains to be seen how long they will last or to what extent they will be implemented at all.
Other country-specific tariffs, which initially mainly affected China, Canada, and Mexico, have in the meantime also been partially suspended or the Trump administration has granted exemptions, including trade covered under the US-Mexico-Canada Free Trade Agreement. The Trump administration has also imposed or threatened to impose bilateral, including “secondary” tariffs on selected countries, including Brazil, Iran, Colombia, Russia, and Venezuela, for primarily political reasons.
Even if the bilateral trade agreements concluded thus far against the backdrop of the threat of “reciprocal tariffs” prove to be robust—and US threats to impose further punitive tariffs on Europe and European countries due to the treatment of US technology companies or EU green regulations raises legitimate doubts about this—it is very unlikely that the Trump administration will refrain from continuing to resort to coercive protectionism as a means of pursuing a range of economic, financial, and political goals. US trade policy will remain disruptive and unpredictable.
US Trade Policies and Goals
US trade policy seems to be pursuing a variety of economic goals that are not always consistent with one another. Large US trade deficits have been a particular concern of the Trump administration. The broad-based “reciprocal tariffs,” whose country-specific level reflects the respective bilateral goods trade balance, seeks to reduce the US trade deficit. The bilateral trade agreements that were negotiated under threat of reciprocal tariffs have generally led to higher US tariffs on imports, improved market access for US exports, and promises by the other party to increase imports of US goods.
The goal of increasing domestic and foreign investment as well as employment in domestic industry has also often been cited as a reason for the imposition of tariffs. The rationale is that if foreign companies face higher US tariffs, they will start setting up production facilities in the US. At the same time, American companies that benefit from greater protection from foreign competition will also expand their own production in the United States.
Increasing government revenues is another reason that has been given as a justification for raising tariffs. Higher tariffs may reduce the level of imports, but they also increase overall government revenues. The goal of increasing revenues is nevertheless at odds with the goal of encouraging foreign companies to relocate their production to the United States.
In addition, national security is often cited as a reason for the imposition of sectoral trade restrictions. In some cases, national security does not seem to be the real motivation behind sectoral tariffs. Rather, invoking national security merely serves as a necessary legal justification for imposing lasting sectoral trade restrictions, also known as the Section 232 tariffs. At least in some cases, the real reason for sectoral tariffs has been to support import-competing sectors in key swing states such as Michigan, Wisconsin, and Pennsylvania (e.g., automotive and steel industries). Nevertheless, in other cases the national security justification is credible, even if one may argue about the effectiveness of and the cost-benefit calculus underpinning the various measures (e.g., semiconductors, rare earths, copper).
Finally, the US government has imposed—or threatened to impose—trade restrictions to extract political rather than economic concessions from other countries, including Brazil, Colombia, and India. The country-specific tariffs against Canada and Mexico were also justified based on a political rather than an economic grounds, namely the need to address border security. In this case, however, the justification almost certainly reflected less the administration’s political objectives but, again, rather the need to activate a trade policy instrument that offers the US government wide latitude in terms of the types of trade restrictions it is legally authorized to impose.
Under the International Emergency Economic Powers Act (IPEEA) of 1977, once the government declares a national emergency it can impose virtually any restrictions on cross-border economic exchanges it pleases. At least, this is what has informed the administration’s decision to do so. However, after a second US court ruled in August that the tariffs imposed under IPEEA were unlawful, the Supreme Court will now need to decide whether the government is allowed to keep them in place. Even if the Supreme Court upholds the decision of the lower courts, this would not mean the end of protectionist and coercive trade policies. The government has other policy instruments at its disposal to impose wide-ranging trade restrictions, even if these are generally more cumbersome to apply.
EU-US Trade Conflict and Agreement
It is often unclear what exact objectives the Trump administration is pursuing when it imposes trade restrictions. The justification provided does not necessarily match the underlying motivation or rationale. Whether or not the government's words are taken at face value, it is nevertheless worth asking whether the professed economic goals put forward by the Trump administration can be realized.
First, the Trump administration often invokes US trade deficit as a reason to impose tariffs. However, various studies show that the impact of tariffs on trade deficits is small at best. Bilateral tariffs can help reduce bilateral deficits. But if the tariffs are insufficiently broad and high and, crucially, do not affect the economy’s savings-investment balance, the overall trade deficit will remain broadly unchanged. Aside from the fact that tariffs have a negative impact on productivity and growth, Trump's fiscal policies, which will lead to continued large budget deficits, will limit, if not more than offset, the small effect that higher tariffs may have on the US trade deficit.
Second, the administration has also justified tariffs as a means to increase domestic and foreign investment in domestic manufacturing. But even in sectors where such investments become profitable after the imposition of tariffs, companies will be reluctant to invest large amounts, given the uncertainty of whether tariffs will remain in place in the medium- to long-term. Many of the investments announced by domestic and foreign companies as well as foreign governments are mere window dressing. In fact, many companies will try to “sit out” Trump or at least will wait to see if the tariffs remain in place under the next US administration.
Third, even if tariffs were to result in a significant expansion of domestic manufacturing, they will not lead to a significant increase in employment. Industrial and manufacturing employment has been declining for decades in all advanced economies, and the type of industrial production that is (or would be) profitable and competitive in the United States is very capital-intensive, not labor-intensive. The employment gains due to higher tariffs will be negligible to negative.
Fourth, higher tariffs on imports have also been justified by the objective of increasing government revenue. Unlike in the case of the other objectives, where the effects will only become visible over the next few years, there has already been an increase in tariff-related revenues. Moreover, the Congressional Budget Office estimates that over the next decade the higher tariffs (adjusted for their secondary effects) will reduce the US budget deficit cumulatively by $3.3 trillion—or even $4 trillion if you factor in the resulting lower interest expenses. By way of comparison, the US budget deficit in 2025 is projected to reach $1.9-2.0 trillion, while government revenues for 2024 amounted to nearly $5 trillion. Apart from the fact that a significant portion of the increase in government revenue will effectively be paid for by US businesses and consumers, the tariffs will, if they remain in place, increase revenues. However, higher tariffs will also entail aggregate economic welfare losses, including lower productivity growth and losses to consumers.
Fifth, some trade restrictions are intended to strengthen national security. Higher tariffs will increase the costs of strategically critical goods. But if they lead to an expansion of domestic production capacity, they can reduce dependence on goods imported from abroad. Apart from the fact that many sectoral restrictions relating to national security seem poorly designed, it will take time to build up or expand domestic production capacities (e.g., rare earths, copper). Nevertheless, sectoral restrictions can help to increase longer-term security of supply, even if this entails higher costs.
Overall, higher tariffs will not lead to a renaissance of American industry and manufacturing, not least because the US economy will face higher costs to the extent that it relies on more expensive intermediate inputs due to higher import prices or higher costs of domestic production. Less international competition will also weigh on productivity growth, all other things being equal. Nor will the higher tariffs significantly increase domestic investment in manufacturing.
Even if the US trade deficit were to shrink somewhat, the bilateral trade deficit in goods between the European Union and the United States, which most recently amounted to around €200 billion, will not change dramatically. Higher tariffs will nevertheless make some European exports less competitive, at least compared to domestic producers. Sectoral effects aside, it should be borne in mind that the dollar has depreciated by well over 10 percent against the euro since the beginning of the year, which means that future dollar-euro fluctuations have the potential to offset the increased US tariffs on European imports (even if the increase in US tariffs and the depreciation of the dollar currently represent a double whammy for European exporters).
Transatlantic Trade Conflict
In addition to higher sectoral tariffs (e.g., steel and automobiles), the US government initially imposed tariffs of 30 percent on EU imports in the context of the “reciprocal tariffs,” which were then suspended to allow for bilateral negotiations. Although the EU prepared retaliatory tariffs in response to sectoral and “reciprocal tariffs,” it refrained from imposing them in order not to endanger negotiations.
The EU also refrained from activating its newly established anti-coercion tool, which would have allowed for the imposition of a wider range of economic retaliatory measures. For example, the ability to threaten restrictions on US service exports to the EU would have strengthened Brussel’s bargaining position, not least because the US is a major exporter of services to the EU. The US surplus of trade in services with the EU is almost as large as the EU’s surplus in trade in goods with the US. Admittedly, the threat of retaliation can quickly lead to an unwanted escalation. But a successful geoeconomic deterrence policy can be a very effective tool to avoid costly trade conflicts or at least to reach an agreement on more favourable terms. The EU was not willing to take enough risks in its negotiations with the Trump administration.
China, for example, did not shy away from retaliating against the increase in US tariffs. When the respective tariffs had risen to well over 100 percent, Washington agreed to de-escalate and search for a negotiated solution. To what extent Beijing's willingness to restrict the export of critical raw materials contributed to de-escalation is an open question. The fact is, however, that the Trump administration was responsive in the face of costly retaliatory measures. It also suspended the “reciprocal tariffs” in April after their announcement triggered significant financial market volatility, demonstrating that the Trump administration is not insensitive to the increasing economic and financial costs of trade wars, including geoeconomic retaliation.
Brussels and Washington concluded a “political” trade agreement at the end of July, which is not yet legally binding. According to the agreement, the US will impose a maximum tariff on EU imports of 15 percent, including on cars and car parts. This rate will also apply to future tariffs on pharmaceutical products and semiconductors. The tariffs on a variety of other goods, including aircraft and aircraft parts, are to be lowered to their previous levels. US quotas on steel imports from the EU will also be restored to their “historic levels.”
The EU has also committed to investing $600 billion in the US economy and importing $750 billion worth of energy, although it remains unclear exactly how the EU will be able to deliver on these promises. In addition, all EU tariffs on industrial goods imports from the US are to be abolished. Both sides also committed to reducing non-tariff trade barriers. There remain significant transatlantic differences as to what this means in practice, which could lead to further disputes and instability in bilateral trade relations, including over digital taxes, EU green regulations and the EU treatment of US tech companies.
Geoeconomic Deterrence
The Trump administration is resorting to protectionist threats and measures to pursue a variety of goals. Coercive protectionism will prove to be too irresistible an instrument—in the hands of the current US administration—for it not to be continued to be applied. For this reason alone, international trade as well as transatlantic trade relations will continue to be characterized by instability, unpredictability and unreliability.
US trade policy will fail to achieve most of its professed economic goals, including a significant reduction of its trade deficit, reviving its domestic industry, and increasing employment in manufacturing. Higher tariffs will however increase government revenues, but at the expense of lower long-term economic growth and welfare costs to consumers. Sectoral restrictions may help to reduce critical economic dependencies, but at a not inconsiderable financial and economic cost.
The EU should continue its efforts to reduce or at least manage trade tensions with the US, accompanied by a more effective geoeconomic deterrence and defense strategy. The EU should also accelerate efforts to increase its economic security and make itself less susceptible to coercive protectionism. This should be done through export diversification as well as the reduction of import-related vulnerabilities, whether by means of import diversification or, if necessary, the development of domestic production capacities.
This does not mean that the possibility of trade cooperation with the US, especially in terms of economic and national security, should not be actively and creatively pursued. But US trade policy will continue to be characterized by a low degree of economic and strategic coherence, and the country will not shy away from opportunistically exploiting other countries’ economic dependencies. In view of a strongly transaction-focused US trade policy relying on coercive protectionism, the EU should therefore not overestimate the willingness of the current US administration to reach reliable and lasting agreements.
Markus Jaeger is adjunct professor at Columbia University and an associate fellow at the German Council on Foreign Relations’ (DGAP) Center for Geopolitics, Geoeconomics, and Technology.
