While much of the focus last week was on the war in Iran, the Trump administration re-opened a war on another front by laying the foundations for a new assault on trade.
After the Supreme Court knocked out Donald Trump’s reciprocal tariffs last month, which could force the government to return $US175 billion ($US248 billion) to US importers, the administration immediately replaced those tariffs with a new set, using another legal instrument that is also legally dubious and is already under challenge from 24 US states.
Those tariffs, deployed using Section 122 of the Trade Practice Act, which relates to chronic balance of payments issues (which the US doesn’t have), were only ever an interim measure, designed to keep the tariff revenues flowing for the 150 days allowed by the Act.
Last week, the administration unveiled its proposed permanent replacement for the tariffs the Supreme Court rejected, announcing two separate sets of trade investigations under Section 301 of the Trade Act: an investigation of 16 trade partners for unfair trade practices and 60 (including the 16) for failing to adopt prohibitions on the imports of goods made with forced labour.
Australia has so far dodged being named on the list of 16. However, while it requires large companies to report on how they manage modern slavery risks within their supply chains, it doesn’t explicitly prohibit imports of those goods and therefore is on that longer list.
The list of 16 includes China, the European Union, Singapore, Switzerland, Norway, Indonesia, Malaysia, Cambodia, Thailand, South Korea, Vietnam, Bangladesh, Mexico, Japan, Taiwan and India, but may be expanded. Much of the focus of those investigations is on what the administration calls “structural excess capacity”.
The administration didn’t use Section 301 initially, because it involves investigations that usually take many months and sometimes years, generally relates to specific practices considered unfair or discriminatory to US companies, requires consultation with the targeted country and includes public submissions and hearings. It’s cumbersome and doesn’t envisage the economies-wide tariffs imposed by Trump last year.
The section has been tested in court many times and stood up to legal challenge, although its novel use this time as a substitute for the tariffs the Supreme Court ruled illegal may see it tested again.
The haste that the administration has employed to implement a new tariff wall before the Section 122 tariffs expire at the end of July also raises the likelihood of mistakes.
Already, Singapore has complained that the basis for the US accusations of unfair trade against it are predicated on a US assertion that Singapore has a $US27 billion trade surplus with the US. In fact, the Singaporeans say, based on America’s own data, it has a trade deficit of that magnitude with the US.
Other countries will argue that trade surpluses may reflect comparative advantage, not unfair trade, and that producing more of something than they consume domestically doesn’t reflect unfair trade practices but more efficient manufacturing, better technology, natural resources, scale advantages or more astute management.
There are a host of reasons why some companies and countries can “displace existing US domestic production” or deter US companies from establishing or expanding their own production.
Trump and his administration are fixated on manufacturing and traded goods, constantly reciting the US trade deficit ($US901.5 billion last year) and the deficit in goods ($US1.2 trillion) as evidence of unfair trade without regard to the fact that manufacturing contributes only 10.5 per cent of US GDP.
America’s is a service economy, with services generating more than 80 per cent of GDP. It had a $US339 billion surplus in the trade in services last year, 9 per cent more than in 2024.
While it is true that layers of subsidies, incentives and government procurement policies have been a major factor in China’s export success and in the $US1.2 trillion trade surplus it posted last year, it’s also true that in some sectors, like electric vehicles, it not only controls the supply chain, but it has technology leadership.
Its manufacturing base is larger and more efficient than most other countries’, which is why foreign companies, including American companies like Tesla, Apple and the US auto manufacturers, have large operations within China.
Those sorts of complexities are lost on Trump and his administration, which want to protect America’s manufacturing base, but may be relevant within the investigation’s processes and very relevant should the Section 301 tariffs be challenged in court.
Having to make 16 separate cases for the tariffs and specific instances of unfairness within the extremely tight self-imposed timeframe may also prove more complex than the administration appreciates.
It is unclear how the proposed new tariff regime will interact with the old, under which numerous countries agreed deals with the US that involved promises of investment and increased imports from the US in exchange for reduced tariff rates.
Japan, for instance, promised to invest $US550 billion in the US and allow imports of American cars (which Japanese consumers won’t buy) in exchange for a tariff capped at 15 per cent. South Korea promised $US350 billion worth of investment for a similar cap on its tariffs.
The European Union said it would buy $US750 billion of US energy over three years and encourage $US600 billion of investment in exchange for a ceiling of 15 per cent on most of its exports to the US. That deal has yet to be ratified by the European Parliament, so it could respond to any new tariffs with trade retaliations of its own.
The US relationship with China is different to most because China showed last year that it can counter US tariffs with trade measures of its own, notably by cutting off US access to rare earths – vital for most modern industrial and military technologies – and by halting purchases of soybeans from the US.
The US immediately backed away from the punitive rates it imposed on China’s exports in exchange for a resumption of the rare earths trade and a promise to buy US soybeans.
Trump is supposed to meet Xi Jinping at the end of this month, with trade on the agenda, but may defer the visit because of the war on Iran.
A preliminary meeting between the US Trade Representative, Jamieson Greer, and China’s vice president, He Lifeng, agreed to expand US exports of agricultural and energy products and a formal mechanism to manage the countries’ trade, which Greer said might be called the US-China Board of Trade.
That might help defuse some of the trade tensions between the countries, although it is clear from China’s most recent five-year plan that it is doubling down on its strategy of pursuing global manufacturing dominance, with an emphasis on advanced technologies.
China’s exports have boomed – and the US trade deficit with the rest of the world has been unchanged – even as Trump’s tariffs on China have reduced its trade surplus with the US. At a macro level, at least, the tariffs haven’t hurt China or aided US exporters.
The Trump trade wars, paid for by American companies and consumers, are hurting the US economy and adding to households’ affordability issues even as his war on Iran has sent oil prices – and US petrol prices – surging.
His two wars are damaging and unpopular in the US, which seems likely to lead to a jolting wake-up call at November’s midterm elections to regain some congressional control or influence over America’s relationships with the rest of the world. The rest of the world will hope that they do.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.