Why Trump Will Lose His Trade War
His people don’t know what they’re doing or what they want
Paul Krugman
Apr 16, 2025
Scenes from the trade war:
- In response to Donald Trump’s huge tariffs on Chinese exports, China’s government has suspended exports of rare earth minerals and magnets, both critical to many modern industries and the military
- Trade talks between the United States and the European Union appear to have gone nowhere, with Maros Sefcovic, the EU’s top trade official, reportedly having “struggled to determine America’s aims.”
In other words, the Chinese, unlike the Trump administration, understand what trade and trade wars are about. And the Trumpers, in addition to not knowing what they’re doing, don’t even know what they want.
Here’s what Trump and his sycophants don’t understand about international trade: It’s not about what you can sell, it’s about what you can buy.
Think for a minute about the finances of individuals. Why do people work? Not to be able to boast that they ran trade surpluses with their employers — “Hey, they paid me a lot, and I hardly bought anything from them.” No, people sell their labor so that they can afford to buy stuff.
The same is true for countries. Importing what you want — being able to get stuff from other countries — is the purpose of international trade. Exporting — sending stuff to other countries — is something we do so we can pay for imports.
OK, in practice there’s a bit more to the story, as I’ll explain below, but the complications don’t change the fundamental proposition that the benefits from international trade basically come from being able to import goods that would be expensive or impossible to produce at home. Think hydroelectric power from Canada.
This fundamental reality explains why serious analyses of Trump’s trade war with China often conclude that China, not America, has the upper hand.
Yesterday the
Financial Times had a mostly good writeup of the stakes, which pointed out that US exports to China are “heavily focused on agriculture.” The FT said that these goods are “low value-added,” which I’m not sure is true — U.S. farming is highly productive and highly capital-intensive. But what matters in a trade war is the fact that China can fairly easily find other agricultural suppliers, buying soybeans from Brazil instead of Iowa.
By contrast, the United States will have a hard time replacing many of the goods it imports from China. Furthermore, many of the goods we buy from China are industrial inputs rather than consumer goods.
So Trump has started a trade war that will disrupt our own supply chains. Remember Covid and its immediate aftermath? Remember how shortages spread through the economy and fueled inflation? Those days are about to come back, inflicting especially large damage on the manufacturing sector Trump claims he will revive.
Is the U.S. economy at China’s mercy? No. America remains a highly productive nation that could cope with even severe economic shocks if it had smart, clear-headed leadership. But we don’t.
True, today’s Wall Street Journal has an
article with the headline “U.S. Plans to Use Trade Negotiations to Isolate China.” So you might think that there’s an actual strategy out there. But I don’t believe it, for four reasons.
First, this story was clearly leaked by Scott Bessent, the Treasury secretary, or people close to him. In a normal administration this kind of supposedly inside scoop would offer valuable insights into the policy process. But one thing that’s clear about Trump tariffs is that
there is no policy process. Individual officials — Bessent, Peter Navarro, Howard Lutnick — keep floating policy ideas in public, hoping that putting them out there will somehow create facts. But a day or two later another official will go on TV, or Trump will post something on Truth Social, completely contradicting what the last official said.
So what we’re hearing about Bessent isn’t really a scoop about Trump policy, it’s almost surely an attempt by Bessent to
influence policy. And there’s no reason to believe that he’s actually in charge.
Second, even if U.S. negotiators are trying to cut deals with other countries that would isolate China, they will be unlikely to succeed because Trump has lost all credibility. After all, you can’t make deals with other countries unless foreign governments believe that you will honor the agreements you make. Trump has already destroyed U.S. credibility on that front, ripping up all our existing trade agreements, then making wild changes in his own tariffs every few days.
Third, even if Trump’s promises were credible, why would a European government want to join America’s trade war with China, destroying its own supply chains? If the argument is that it’s worth paying the cost of ruined supply chains because that will protect you from Trump’s tariffs, who trusts Trump not to reimpose punitive tariffs on our supposed allies the next time he thinks they’re looking at him funny?
Fourth, the Trump administration is bringing a knife to a gun fight.
To the extent that there’s a real plan to confront China, it appears to center on reducing China’s ability to sell abroad. It’s true that this will be painful for China’s export sector. As I said, my flat statement that trade is about imports, not exports, needs some qualification because the short-term interests of exporters can’t be ignored. But China can cope with lost exports by aiding affected industries, the same way Trump funneled money to farmers hurt by his first trade war. It can also offset any loss of export jobs by stimulating domestic demand. Moreover, Xi and the Chinese Communist Party don’t face elections.
So while China can manage the loss of exports in various ways, it will be much harder for America to cope with the loss of crucial inputs produced in China.
The overall point is that even relatively sophisticated Trumpers like Bessent are still thinking in terms of Chinese access to the markets of the United States and our imagined trade war allies, when the real issue now is whether China can strangle the U.S. economy by disrupting our supply chains.
PS: I know that I’m mixing metaphors here — China has brought a gun that is strangling us by cutting our supply chains. But you get my point.
Furthermore, America’s ability to fight a trade war is severely damaged by our descent into authoritarian rule. A few months ago other advanced countries might have been inclined to take our side because of shared democratic values. Now we’ve become a country whose government claims the right to kidnap people whenever it likes and ship them to foreign gulags. Who wants to be allied with such a government? Who will trust such a government to keep its word on anything ?
Of course, the fact that the collapse of democracy will contribute to our defeat in the trade war isn’t the main reason to be horrified at where we are. Losing real GDP is bad, but it’s much less important than losing our soul. As it happens, however, we seem to be on track to do both.
His people don’t know what they’re doing or what they want
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