The Trump 2.0 Era:
Analyzing the Trajectory of
the Global Economy

Trump, Applying Stronger Economic Pressure on Allies Than Adversaries

Since taking office, US President Donald Trump has continued to threaten new tariff walls around the US economy unless US partners in North America, Europe, and East Asia meet his demands on economic and other policies (e.g., immigration controls and drug interdiction). Existing free trade agreements (FTAs), including the US-Mexico-Canada Agreement (USMCA) that Trump negotiated in his first term, will not immunize US trading partners from the new tariffs.
Likewise, the KORUS FTA will not shield Korean exporters from new US tariffs applied against imports of autos, steel, and semiconductor chips and other products. The auto sector alone accounted for almost $50 billion or 38% of US imports from Korea in 2024.
Trump intends to invoke existing legislative authority accorded the President under emergency conditions or for national security reasons (e.g., International Emergency Economic Powers Act of 1977; section 232 of the Trade Expansion Act of 1962) to implement the new tariffs, even though such measures will restrict trade and harm relations with our closest allies more than trade with China or Russia. Using such authorities against US allies is controversial to say the least and of dubious value in terms of enhancing US security interests.
So far, Trump has imposed 25% tariffs on imports from Mexico and Canada (though only 10% duties on Canadian energy exports and now mostly deferred until April 2), and 20% on Chinese goods (on top of existing trade war tariffs in place since his previous administration). He also plans to impose on March 12 new 25% tariffs on US imports of steel and aluminum from all countries, and 25% tariffs on US imports of autos, semiconductors, and pharmaceuticals starting in early April. And he hasn’t forgotten US allies in Europe, who can expect new duties around 25% before Easter.
Target countries seem to be arrayed by the size of their bilateral merchandise trade surplus with the US. In 2024, the global US merchandise trade deficit was about $1.2 trillion; almost two-thirds of the global deficit was recorded with China ($295 billion); EU ($236 billion); and Mexico and Canada (combined $235 billion). Following this criterion, others that also could be targeted by Trump tariffs include Vietnam, Taiwan, Japan, and South Korea.

New Tariff Policies: Harmful to the US Economy

While new US tariffs are meant to turn the screws on foreign countries, their impact also will damage the US economy.
The combination of new tariffs against USMCA partners and China, plus higher steel and aluminum tariffs on both raw and derivative products, will sharply inflate US production costs across industrial sectors. Importantly, the added costs will weaken the competitiveness of US auto producers whose supply chains crisscross the highly integrated North American auto market. Mexico and Canada account for about half of total US auto sector imports which were valued at about $472 billion in 2024. The new tariffs create expensive roadblocks to North American production and thus encourage more US car imports from Europe and Asia. That is why US auto CEOs lobbied Trump to reduce the tariff burden on their operations, but they only convinced him on March 5 to defer the 25% auto tariffs until the first week of April. At that time, it is highly likely that Trump also will follow through on his threats to impose 25% tariffs on US auto imports from other countries in Europe and Asia.
McKibben and Noland (2025) examined several scenarios in which US tariffs are applied to Mexico, Canada, and China and found that the tariff increases “would slow growth and accelerate inflation in all three countries.” Clausing and Lovely (2025) studied tariff policies against Mexico, Canada, and China in the early stages of Trump 2.0, and estimated that the cost of purchases by the average US household would increase by about $1,200 per year. As the mix of tariffs changes and more countries are added to the list, if many of Trump’s targets “reciprocate” by retaliating against US exports, the cost will obviously rise.

Trump 2.0, Full-Scale Trade Policy Rebalancing

One of the objectives of Trump 2.0 is to rebalance US trade relationships. On the first day of his second term (January 20, 2025), Trump issued a memorandum entitled America First Trade Policy, followed by a February 13 memorandum on reciprocal trade and tariffs, ordering the development of a comprehensive plan for restoring fairness in US trade relationships. These documents make clear the Trump Administration regards the prevailing pattern of tariffs and non-tariff measures in trading partners as detrimental to US firms. Particularly noteworthy is a premise of the Fair and Reciprocal Plan that “only America should be allowed to tax American firms.” A package of recommended measures to address the various inequities are to be announced on April 1, 2025.
The core presumption of the administration is that US tariffs are much lower than those imposed on the same products in trade partners. This in turn is held to drive the large US overall trade deficit. The concern extends beyond tariff differentials and includes alleged currency manipulation by trade partners and inequities created by domestic tax and regulatory regimes in trading partners, even though these apply on a non-discriminatory basis to domestic and foreign firms/products.
Trade policy is regarded as the instrument sine qua non to address the various inequities and harms imposed on the US by the rest of the world. This spans unilateral imposition of tariffs, the abolition of de minimis exemptions for import consignments with a value of less than US$800, reviewing extant trade agreements and the effects of the WTO Government Procurement Agreement, and bolstering the already wide range of instruments used to manage trade with China. These are all intended to incentivize the negotiation of new agreements on a bilateral or sector-specific basis.
The first two months of the Trump Administration saw across-the-board additional tariffs of 20% on Chinese exports to the US and 25% tariffs on Canada and Mexico, essentially abrogating the Trump 1.0 negotiated US-Mexico-Canada agreement (USMCA). The implementation of tariffs was followed by immediate retaliation, which in the case of Canada and Mexico led to a delay in implementation until April 2 and a decision to limit the scope of the new tariffs to goods that do not comply with the USMCA (i.e., those not subject to FTA privileges). The imposition of tariffs is seen as a pressure tactic to achieve favorable outcomes in bilateral trade negotiations. However, this approach should not be viewed merely as a negotiation tool, as there is also the goal of increasing government revenue through trade taxation, which would enable a reduction in income taxes. The motivations and ultimate goals behind Trump’s trade policy activism are fraught with significant uncertainty, greatly complicating both responses and the scope of negotiations. Unpredictability is a feature of the US strategy (insofar as there is a strategy).

US-EU Trade Conflict and the Possibility of EU Retaliatory Measures

In the case of the EU, concerns expressed by Trump include differences in tariffs on cars (EU: 10% vs. US: 2.5%), the large imbalance in trade in agricultural products, where the EU is argued to discriminate against US produce through a mix of high tariffs, subsidies and regulatory measures (sanitary and phytosanitary standards), and the imposition of digital services taxes by several EU member states and EU-level digital regulation (e.g., the Digital Services Act and the Digital Market Act).
The trade war with the EU recommenced with actions taken by Trump 1.0, with the stated intent to (re-) impose tariffs of 25% on imports of aluminum and steel products on March 12, 2025. This may be followed by across-the-board tariffs on EU exports of goods of 25%, with mutual tariffs potentially introduced to offset the effects of EU non-tariff measures. Thus, the US may decide to apply taxes equivalent to EU VAT rates on imports (the average EU VAT rate is 21.8%) and/or base additional tariffs on estimates of the ad valorem tax equivalents of EU regulations. If so, bilateral trade will be affected significantly as the US is the EU’s largest market for the export of goods.
Much will depend on how the EU responds. The EU is the second largest market for US exports of goods and the largest global market for US exports of services. The deficit on the bilateral trade balance for goods is largely offset by a US services export surplus, a fact that does not appear to figure much in the narrative of unfair treatment. The overall bilateral EU trade surplus in 2023 was only €48 billion, while the total EU-US trade amounted to €1.6 trillion. While the EU has signaled that it is very open to negotiation on specific instances of US concern—e.g., car tariffs—and is willing to engage in managed trade deals—e.g., import more US LNG—the scope for negotiated outcomes is constrained. Thus, it is very unlikely that the EU will change its regulatory standards for food safety, which are claimed to impose additional costs for US farmers that export to the EU. Insofar as the US seeks to link negotiated agreements to changes in EU external (foreign) policy, the scope for negotiated solutions may be reduced. Efforts to negotiate a sectoral deal on steel with the Biden Administration failed due to US demands that the EU impose additional duties on Chinese steel that would have violated the EU’s WTO commitments.
Retaliation is likely to be an important component of how the EU responds, in turn being a central dimension of the effects of Trump 2.0 on the EU. Retaliation is facilitated by the 2023 anti-coercion instrument, developed in response to Trump 1.0. This gives the EU the ability to credibly threaten retaliation with a view to inducing a negotiated outcome to address foreign trade measures that seek to coerce the EU to change its external policies. Retaliatory measures may span not just tariffs on US goods exports but can include trade in services and investment. Thus, in addition to counter measures on imports of US goods (increase tariffs on a proportionate basis targeting politically-sensitive US states, sectors and products), the EU may choose to restrict imports of services—in which the US has a trade surplus reflecting its comparative advantage—or access to the EU public procurement market.
Rapid, proportional retaliation is important to demonstrate the EU will defend its interests. At the same time the EU can be expected to abide with WTO commitments—e.g., indicating readiness to revise retaliatory measures if deemed disproportional by a WTO panel. Given the costs of retaliation—which are borne by EU firms and consumers as well as US exporters—there is good reason to try to limit escalation. There are likely to be internal anti-bodies to unpredictable US trade protectionism. It hurts US firms and consumers, breaks supply chains and likely will have negative repercussions for investment sentiment and inward investment flows—and thus the goal of revitalizing US manufacturing.

Trump Announces Successive Tariff Measures Following US-Japan Summit

Japanese Prime Minister Shigeru Ishiba and US President Donald Trump held their first summit in Washington on February 7. Ishiba had meticulously prepared to avoid economic policy pressure from Trump, offering key economic concessions. Japan pledged to increase imports of US liquefied natural gas (LNG) and announced plans to expand Japanese investment in the US to $1 trillion. With Ishiba presenting this “gift package,” the summit proceeded in a friendly atmosphere, and no concrete discussions on tariffs on Japanese products took place. In Japan, the meeting was widely seen as a diplomatic success, bolstering Ishiba’s reputation. However, just after Ishiba’s return, Trump announced a series of additional tariff measures that included Japan, dealing a blow to Ishiba’s political standing.
On February 10, Trump declared a 25% tariff on all imported steel and aluminum products, targeting all countries. While his first administration had imposed similar tariffs in 2018—25% on steel and 10% on aluminum—these measures had been weakened under the Biden administration due to expanded exemptions. By reinstating the tariffs, Trump aimed to restore their effectiveness.
Further escalating trade tensions, on February 13, Trump signed a presidential memorandum introducing a “reciprocal tariff” system, which would impose equivalent tariffs on imports from countries that apply high tariffs on US exports. This policy could take effect as early as April.
Trump’s primary goal with reciprocal tariffs is to reduce the US trade deficit. Given this objective, the countries with the largest trade surpluses with the US are likely to be targeted. In 2024, China remains the largest source of the US trade deficit, but Japan ranks seventh in terms of deficit volume and fifth in import value. South Korea also ranks high, placing eighth in the trade deficit and fifth in import value. As a result, both Japan and South Korea are unlikely to escape the impact of Trump’s new tariff measures.

Auto Tariffs: A Major Blow to the Japanese Economy

During the US-Japan summit, President Trump mentioned the possibility of reciprocal tariffs, but prevailing sentiment in Japan was that the impact on its economy would be minimal. Since Japan’s imports from the US primarily consist of industrial goods with low tariffs—including tariff-free automobiles—many believed Japan would be exempt from the new tariff policy. In contrast, agricultural products face relatively high tariffs, but Japan’s total food exports to the US in 2024 accounted for only 1.0% of total exports, amounting to 213.1 billion yen. Moreover, the bulk of these exports were processed foods, with raw agricultural exports estimated to be even smaller. As a result, even if retaliatory tariffs were imposed on Japanese agricultural products, the overall economic impact was expected to be negligible.
However, the situation shifted dramatically following the announcement of reciprocal tariff measures on February 13. The Trump administration declared that, in addition to foreign tariff rates, it would also target non-tariff barriers such as unfair subsidies and regulations, value-added tax (VAT) systems, exchange rate policies, and inadequate intellectual property (IP) protections—any factor deemed to restrict US trade. The US has long criticized Japan’s strict automotive safety and environmental standards, viewing them as non-tariff barriers. With these factors now in play, the likelihood of Japanese automobiles becoming subject to reciprocal tariffs has increased significantly. On February 14, President Trump further stated that tariffs on automobiles could take effect as early as April 2, later specifying a tariff rate of 25%.
According to the US Department of Commerce, America’s total passenger car imports in 2024 amounted to $214 billion, significantly exceeding its $58.1 billion in exports. The largest source of US auto imports was Mexico ($48.7 billion), followed by Japan ($39.9 billion) and South Korea ($37.3 billion). Canada and Germany were also among the top five. However, given that many foreign automakers, including Japanese firms, manufacture automobiles in Mexico and Canada for near-tariff-free export to the US, the actual ranking and import value of Japanese and Korean automobiles could be even higher.
Currently, Japanese passenger car exports to the US are subject to a 2.5% tariff. If this rate were to increase to 25%, Japan’s real GDP could decline by approximately 0.2% over two years. Given Japan’s potential growth rate is estimated to be in the mid-0% range, this decline would represent a significant economic shock. Despite the additional tariffs, Japanese automakers cannot afford to withdraw from the massive US market. Instead, they will likely shift more of their exports to local production within the US over time. However, this transition would reduce domestic manufacturing and employment in Japan, leading to long-term economic hollowing and a decline in the nation’s growth potential.