The hidden agenda behind Trump’s reciprocal tariffs
Regarding the Donald Trump administration's recently announced reciprocal tariffs, I wasn’t particularly interested in the tariff rates per se. Determined unilaterally by the United States Trade Representative (USTR), they were naturally going to be arbitrary. I was intrigued more about whether the USTR, with barely 100 staff members, could deliver high-quality, logically coherent rates for so many countries in such a short time. However, when I saw the actual tariff rates, I was disappointed and shocked.
It became clear that the U.S. government had used an alarmingly simplistic method — dividing the trade deficit by imports — to calculate tariffs. If it had been up to me, I would have used econometric methods to derive an average global tariff rate that would balance the U.S. trade account, then applied weighted adjustments based on the size of each country's trade deficit and by commodity. This would have lent greater credibility to the rates. Even so, because the trade deficit carries so much weight in the formula, the final results wouldn’t have differed drastically.
That said, this tariff hike — though not genuinely “reciprocal” — will likely have some impact. The primary objective is to reduce the trade deficit, but I believe that’s only the surface-level goal. Yes, the trade deficit will likely shrink. Countries unwilling to challenge the U.S. may try to increase their imports of American goods — mostly raw materials, given the weak competitiveness of U.S. manufacturing — and use this as leverage to negotiate lower tariffs. That would help cut the deficit.
The policy may encourage more foreign companies to invest directly in the U.S. economy. Higher tariffs make it less attractive to export to the U.S., and more appealing to produce locally there. However, not all companies are in a position to invest in the U.S. Though the U.S. accounts for about 27 percent of global GDP as of 2024, its import market represents just 13 percent of global demand. For companies heavily reliant on the U.S. market, setting up production within the country might make sense. But most businesses that intended to invest in the U.S. likely already did so during the previous eight years of the Trump and Biden administrations. Some may announce symbolic memorandums of understanding, but actual increases in U.S. investment — and, consequently, job creation — will be limited.
The policy most of all will effectively contain China, the U.S.’ most significant economic rival. Both Republicans and Democrats see China as a major threat to U.S. economic supremacy. China's GDP relative to the U.S. skyrocketed from 11.8 percent in 2000 to 75 percent in 2021. Some analysts even predict that China will soon surpass the U.S. economically. Many Americans hope that China’s economy will collapse before it reaches that point — as Japan's did when it reached about 73 percent of U.S. GDP.
One of the biggest failures of the past eight years of China strategy was the failure to close off loopholes — particularly exports to the U.S. routed through third countries like Vietnam. For example, as of 2024, the U.S. trade deficit stands at $1.1989 trillion annually, with Vietnam ranking third after China and Mexico. Vietnam, which accounts for only 0.4 percent of global GDP, represents about 10 percent of the U.S. trade deficit. The steep 46 percent tariff imposed on Vietnam clearly targets China’s indirect export routes. In this respect, the policy appears remarkably precise and could be highly effective.
The tariffs could serve to deflate the current stock market bubble. The Trump administration began amid record-high stock market levels — S&P 500 hit all-time highs in late 2023 and early 2024. This implies that it's increasingly difficult to push the market higher through policy alone. For Trump, while the stock market is a key economic indicator, tariffs are core to his political identity. Thus he will be willing endure short-term market corrections now, so long as the market recovers ahead of the midterm elections two years later. Whether this happens depends on whether the U.S. economy can withstand the shock of tariffs and emerge fundamentally stronger.
Perhaps the most important objective of Trump's tariff strategy is to capture media attention and dominate public discourse. Whether positively or negatively, the world is focused on Trump. That alone could be seen as a success for him. What many Americans want in a president is not someone who is meek and swayed by foreign influence, but someone who projects strength befitting the world’s most powerful nation. Ironically, the more the media criticizes Trump, the more it may amplify his influence.
That said, for Trump’s strategy to work, it requires his trade policy advisers to be exceptionally analytical and forward-thinking. Unlike foreign or military policy, trade policy is a brutal money game. Foreign governments and corporations do not passively accept U.S. actions; they respond, sometimes directly and sometimes in more sophisticated ways. Trump’s team must be prepared for every possible countermeasure. A wait-and-see approach simply won’t cut it. The U.S. must convey that it’s meticulously prepared and that any resistance could be disastrous. However, the discrepancy between the tariff rates Trump announced in the Rose Garden on April 2 and those later disclosed in the actual executive order has cast doubt on his administration’s internal coherence. It exposed a critical weakness in his team. Unless things change, a U.S. victory in this economic war is far from guaranteed.
Trump’s current approach resembles a blitzkrieg — a rapid and aggressive campaign that requires meticulous planning and synchronized execution. To date, his team has not displayed such cohesion. There may be more going on behind the scenes that I’m not aware of. The actual trade experts may well be far more capable than they appear. Still, one thing is clear: today's Trump is not the same master strategist we saw in 2018, at the start of the first trade war.
Joo Won is deputy director of the Economic Research Department at Hyundai Research Institute.