The Great Trade Hack: How Trump's trade war fails and global trade moves on

Introducing the idea of "The Great Trade Hack"

The book The Great Trade Hack - Why Trump's Trade War Fails, and the World Moves On emerged from urgent analysis of historically significant events affecting the global trading system. Written quickly to remain timely, it aims to address widespread misunderstanding about current developments of Trump’s trade policies and their implications. The analysis focuses primarily on future scenarios, recognizing that while the future remains unknowable, conversations among experts across different domains can improve preparedness and understanding.

The historic impact of "The Great Trade Hack"

The April 2nd tariffs, or Trump's “Great Trade Hack,” represent a pivotal moment when America ceased leading the world trading system—a date comparable to other historic turning points that future generations will study. The term "hack" reflects Trump's approach: bypassing established procedures, short-circuiting rules, and brute-forcing solutions through massive, globally simultaneous tariffs. These actions represent not a traditional trade war but a comprehensive assault on the trading system itself.

The April 2nd tariffs differed fundamentally from previous trade disputes. Unlike earlier specific measures targeting particular products or partners, this action massively and intentionally violated every U.S. trade commitment made since 1947. It broke all WTO obligations and free trade agreements simultaneously while deliberately violating the non-discrimination principle enshrined in Article 1 of WTO rules. Previously, the U.S. established, guided, and defended the rules-based system for enlightened self-interest, enhancing its economic, political, and geostrategic power during the Cold War and other conflicts. After April 2nd, the U.S. abandoned the system without proposing reforms or alternatives, simply walking away from rules it had championed. The conflict's perception shifted from U.S.-China tensions to the U.S. versus the world. What previously resembled the trade disputes between the U.S. and Japan in the 1980s and 1990s—specific problems with particular countries—became global confrontation.

China, Russia, and emerging economies gained politically from America's eroded status, as worldwide suspicion now characterizes U.S. trade relationships. Countries negotiating with America face unprecedented uncertainty about future U.S. actions, exemplified by sudden tariff changes that potentially void existing agreements. This transition represents the end of the American Leadership Era characterized by enlightened self-interest that benefited both the U.S. and global partners, replaced by the Post-American Leadership Era where the U.S. has abandoned the world trading system entirely.

Assessing Trump's underlying motives

Trump's tariffs are economically incoherent as trade policy, which creates a paradox and makes traditional economic analysis inadequate for understanding his approach. Instead, I believe the "Grievance Doctrine" drives his policies—a framework where grievance rather than economic goals guides decision-making. This “Grievance Doctrine” stems from a narrative which portrays America as a victim of both foreign globalists and domestic traitors. According to this narrative, America naively played by trade rules while being exploited, resulting in stolen factory jobs, humiliated national pride, and middle-class suffering. This subsequently creates a mandate for retribution without specific economic objectives. This victimhood narrative appears paradoxical to international observers who view America as the primary beneficiary of the global trading system since 1947. Most countries, particularly emerging markets, consider themselves victims of U.S.-led trade policies that primarily served American multinational interests.

Official documents also support this grievance-based approach. The 2025 U.S. Trade Policy Agenda by the U.S. Trade Representative opens with unusual language describing America as "the most extraordinary nation" that "saved the entire world," followed by a fall narrative blaming "globalist elites" for America's industrial decline and middle-class atrophy. The document positions Trump as the sole leader who recognized this victimization and promises trade challenges will be "annihilated," setting a tone that differs greatly from the language used in traditional trade policy doctrine. The April 2nd tariffs align with the “Grievance Doctrine”: eliminating trade deficits to "stop the steal," maximizing bilateral leverage through discrimination, and creating dramatic policy reversals that appear as strength and wisdom to Trump's base.

The April-May timeline lends credence to my claim that this is grievance-driven policy. After announcing massive tariffs on April 2nd, market turmoil and supply chain disruptions forced partial retreat by April 9th, except for China where tariffs remained punitive. By May, factory shutdowns due to Chinese input shortages created economic crisis, but Trump couldn't unilaterally reverse China tariffs without losing face under the Grievance Doctrine. China's strategic response proved effective: refusing negotiations until the U.S. acknowledged mistakes, then accepting Trump's face-saving reduction offer. The May 12th U.S.-China deal mutually reduced tariffs by 115%, essentially reversing the April 2nd logic while allowing Trump to claim victory. China's willingness to let America portray this as a U.S. win demonstrates understanding that Trump's grievance-driven policy prioritizes appearances over substance.

Why Trump's tariffs fail economically

Trump's comprehensive tariff policies fail economically while succeeding politically, and I will argue that American protectionism is a permanent shift. . From an economic perspective, rigorous analysis demonstrates that tariffs fundamentally cannot achieve their most prominently stated objectives across three critically important areas of national economic policy.

First, tariffs absolutely cannot fix persistent trade deficits because trade deficits represent nothing more than the basic arithmetic difference between total economy-wide spending patterns and aggregate national production capacity. Americans consistently spend substantially more than they produce domestically, necessarily requiring imports from foreign suppliers to balance this fundamental difference and meet domestic demand. Tariffs, regardless of their size or scope, simply cannot meaningfully reduce aggregate national spending or significantly increase total domestic production in a full-employment economy operating at or near capacity, making substantial reduction of trade deficits through the imposition of tariffs economically impossible. Any temporary reduction achieved through severe recession-induced spending cuts would inevitably prove short-lived, automatically reversing once economic recovery begins and normal consumption patterns resume.

Second, tariffs fundamentally cannot achieve meaningful reindustrialization of the United States or restore the country's historically dominant manufacturing base. Genuine, sustainable reindustrialization necessarily requires carefully coordinated long-term investments spanning five to ten years at minimum, extensively trained workers who possess the sophisticated skills necessary to operate efficiently in highly automated 21st-century factories, and world-class physical infrastructure including modern transportation networks and reliable energy systems. Tariffs achieve absolutely none of these essential prerequisites for industrial development and frequently produce directly opposite effects that actively undermine reindustrialization efforts. Trump’s tariffs are particularly problematic due to their volatile, unpredictable nature, which creates enormous uncertainty about future trade conditions, destroying long-term business investment in domestic manufacturing capacity or workforce training programs and employee investment in their own human capital.

Third, tariffs demonstrably do not help the broad American middle class that constitutes the primary political constituency for anti-globalization policies. While tariffs do provide some protection for goods-producing sectors such as steel and automotive manufacturing, comprehensive employment statistics clearly show that only 10% of middle-class workers are actually employed in these protected sectors that might theoretically benefit from tariffs. The remaining 90% of middle-class workers are employed in service sectors, where tariffs only increase the cost of living.

Tariffs primarily serve as politically expedient substitutes for genuine economic solutions while simultaneously deflecting public attention and blame away from fundamental domestic government policy failures. Genuinely effective policies would resemble Canadian-style policies including the universal healthcare systems, free or affordable university education, excellent primary and secondary schools with adequate funding, and active labor market adjustment policies that help workers adapt successfully to technological change and economic transitions.

However, implementing such comprehensive and genuinely effective solutions would inevitably require significantly higher tax rates, substantial increases in government size and spending—all of which remain virtually impossible to achieve politically in contemporary America. Consequently, tariffs and broader anti-globalization policies effectively function as policy placebos that are administered by political leaders instead of genuine economic medicine that would actually address underlying structural problems.

Both major political parties, Democratic and Republican alike, now routinely use this fundamentally deceptive approach to divert public blame away from persistent domestic economic failures. Even the Biden administration, despite its generally internationalist orientation, systematically adopted "worker-centric trade policy," implying that international trade policy, rather than domestic institutional failures and policy choices, has been primarily responsible for harming America's working class and middle-class economic prospects over recent decades.

U.S. trade hesitancy or trade hostility as a permanent stance

U.S. trade policy has undergone a profound and seemingly irreversible transformation from enthusiastic support of trade to outright hostility, fundamentally altering the landscape of international commerce and making any meaningful return to pro-trade positions politically impossible in the foreseeable future. In today's deeply polarized political environment, it has become virtually unthinkable for any serious presidential candidate to advocate returning to the George Bush Jr. or Clinton era when trade was widely viewed as a positive force for American prosperity and the U.S. consistently and actively supported the global trading system through both words and actions.

The comprehensive transformation from what can be characterized as "super pro-trade" policies to increasingly "trade-hesitant" approaches began in earnest following the devastating global financial crisis and the subsequent Great Recession, which fundamentally altered American perceptions of globalization and international economic integration. During the earlier period from 1981-1993 spanning the Reagan and Bush Sr. administrations, and subsequently from 1994-2008 covering the Clinton and Bush Jr. presidencies, the United States maintained remarkably strong pro-trade positions, actively creating foundational institutions like the World Trade Organization, enthusiastically facilitating China's complex accession process to the WTO, and establishing landmark agreements such as the North American Free Trade Agreement (NAFTA).

Obama's presidency distinctly marked the critical inflection point toward trade hesitancy, characterized by the systematic freezing of numerous ongoing trade negotiations that his predecessor had initiated, and notably becoming the first American president to deliberately block WTO Appellate Body member appointments, thereby beginning the systematic undermining of the multilateral trading system. Although Obama personally remained fundamentally committed to globalist principles and international cooperation, the intense political pressures arising from widespread middle-class economic suffering that was increasingly attributed to the negative effects of globalization effectively prevented him from adopting overtly pro-trade positions that might have been politically damaging.

Trump dramatically escalated this trajectory from mere hesitancy to outright trade hostility through his tariff policies and anti-globalization rhetoric, which was subsequently followed by Biden's tactical return to trade hesitancy while paradoxically maintaining the vast majority of Trump's controversial tariffs and simultaneously intensifying targeted actions against Chinese advanced manufacturing capabilities. The current Trump administration represents what can only be described as completely unbound trade hostility, unleashing protectionist measures on an unprecedented scale.

This fundamentally protectionist stance appears to have become a permanent fixture of American politics due to a particularly vicious and self-reinforcing political cycle: persistent middle-class economic distress creates overwhelming demands for decisive political action from elected officials, yet the genuinely effective social policies that could meaningfully address these underlying economic challenges—such as comprehensive healthcare reform, substantial infrastructure investment, and robust social safety nets—invariably require significantly higher tax rates that remain politically impossible to implement in the current anti-tax political climate. Consequently, anti-globalism and trade protectionism serve as readily available policy placebos that persist exactly because they are economically ineffective at solving the underlying problems, thereby creating continued and intensifying demand for even more aggressive protectionist measures. This clearly represents a fundamental structural shift in American political economy that appears likely to persist regardless of which party controls the presidency or Congress.

Possible future scenarios

Despite U.S. violations, the global trading system remains functional. While the U.S. is the largest goods importer, it accounts for only 15% of world trade, meaning that 85% of global commerce continues following WTO rules. The "Great Trade Hack" created significant ripple effects, with third countries adjusting policies in response to U.S. tariffs. This manifests through "cascading protectionism"—when U.S. protection creates trade diversion, leading to new protectionist pressures and additional tariffs. Chinese electric vehicles provide a clear example: U.S. tariffs of 100% diverted trade to Canada, which imposed matching tariffs, prompting European protection as well. Conversely, "domino liberalization" accelerates as exporters seek alternative markets. Since April 2nd, previously stalled agreements gained momentum: the UK-India trade deal, UK accession to CPTPP, and China-Brazil agreements all advanced rapidly as exporters displaced from U.S. markets pressure governments for new market access.

Four potential scenarios emerge from these competing dynamics. The “1930s scenario” represents a system-wide collapse if countries abandon WTO rules and follow grievance-based policies triggered by cascading protectionist measures without WTO guardrails and Chinese retaliation against anti-China provisions in U.S. partner agreements.

Three less radical scenarios appear more likely. The first scenario, which is actually underway, is "Managed Multilateral Drift" which involves continued mixed protectionism and liberalization with only the U.S. deliberately and blatantly violating WTO rules.

"Fighting trade blocs" would see the U.S., EU, and China forming competing trade blocs with systematic tariff increases outside of WTO rules.

"Re-globalization without America" envisions U.S. isolation through tariffs, while the rest of the world returns to viewing trade as infrastructure in developing prosperity, with America becoming increasingly closed while global commerce expands elsewhere.

World leaders’ possible actions and “Leadership Herds”

The prime directive for maintaining the global trading system is for world leaders to save the rules-based system by following established rules. If the 80 countries accounting for 85% of trade that does not involve the U.S. simply continue following WTO rules, the system will survive, since system stability will be maintained by this substantial portion of global trade. Most countries should avoid retaliating against the U.S., with the notable exceptions of China and the EU. Only these two economies possess sufficient size and independence to withstand U.S. economic pressure. Their economies could function relatively well even with severe U.S. trade disruptions, unlike smaller, more dependent economies.

Other countries, including Japan, should negotiate based on the understanding of the "Grievance Doctrine." When considering concessions to President Trump, they must recognize that his approach is not based on detailed economic analysis but rather on perceptions of trade deficits. While agreements to purchase more commodities, for example, represent a win in his view without requiring specific quantitative targets, the primary consideration is how agreements appear rather than their substantive economic impact. In addition, radical actions by other countries should be avoided for the time being. Clarifications regarding the tariff decisions are expected by July 9th, but the timeline may shift given the ongoing policy uncertainties. Maintaining a diplomatic framework with the U.S. remains crucial to keep doors open for potential re-entry into the multilateral system, despite my prediction that such re-engagement is unlikely.

Another aspect to keep in mind is that if trade deficits continue as a major concern and tariffs fail to address them, the administration may shift toward macroeconomic tools in the form of The Mar-a-Lago Accord proposal and Section 899 of the budget bill, which provide new mechanisms for pressuring other countries through taxation measures rather than tariffs. These tools could severely disrupt global financial systems, requiring comprehensive preparatory planning from all countries and companies.

While no single country can replace U.S. trade leadership as neither the EU, China, Japan, nor any other country possesses the necessary combination of size and capability, effective leadership already exists through informal "leadership herds" of cooperating nations. When the U.S. left TPP, Japan organized a coalition without formal structures or titles that successfully created CPTPP. Similarly, when the U.S. blocked the WTO Appellate Body, the EU coordinated with multiple countries, including China, to establish the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution. These informal coalitions demonstrate that effective trade leadership can emerge through cooperation among like-minded countries that share similar interests, without requiring formal chairmanships or committee structures. Since WTO rules have not been updated since 1994, these coalitions might provide a silver lining by enabling progress that formal structures have failed to achieve.

Comment

OKUBO Toshihiro:
Japan presents a unique globalization pattern characterized by strong trade liberalization alongside strong anti-immigration sentiments. Data from a survey conducted jointly with NIRA Research Institute targeting 10,000 Japanese workers reveals that 27% of respondents hold positive attitudes toward free trade, with older populations and higher-income groups showing even greater support. However, immigration policy faces significant opposition, with 27% opposed compared to only 15% supporting increased immigration. When examining specific policy preferences, public opinion shows more variety of positions. While there is some support for foreign worker policies due to labor shortages, significant resistance remains regarding foreign acquisition of Japanese companies and foreign real estate purchases in Japan.

Japan's homogeneous society exhibits three distinctive characteristics that influence globalization attitudes: strong social norms with numerous unwritten rules, powerful social identity based on group affiliations, and robust social capital including trust in government and mutual assistance networks. These factors, combined with the current increasing influence of social media which leads to greater societal fragmentation, create conditions where anti-globalization sentiments could emerge more readily. Information consumption patterns vary significantly by age group and the younger generations rely heavily on social media which may amplify emotional responses to globalization issues rather than evidence-based analysis.

The survey findings also revealed complex attitudes toward international leaders such as those of the U.S., China, and Russia. Negative impressions dominate. These attitudes present challenges for Japan's participation in global leadership coalitions. Given this background, academia must play a central role in developing comprehensive strategies to navigate these complex dynamics.

Q&A

Q:
Given the current conflict between the U.S. and the rest of the world, including China, should Japan tolerate the expanding exports from China?

Richard BALDWIN:
Studies by Simon Evenett on the quantitative possibility of trade diversion have shown that there are only about 100 products that China exports to the U.S. that could lead to serious disruptions in other markets. Since Chinese exports to the U.S. are fairly limited, China is not as big of a threat as commonly assumed.

China will likely engage in dumping practices of goods before tariffs. Countries like Japan, the EU, and other countries can respond with anti-dumping duties, which remain fully consistent with World Trade Organization (WTO) rules. This disciplined approach, with appropriate guardrails, should prevent escalation.