Trump’s Strategy: Tariffs First, Negotiations Later

After returning to the White House at the beginning of 2025, US President Donald Trump implemented a series of bold reforms that caught international attention. One of the plans that sparked interest was his announcement on April 2, which he dubbed “Liberation Day,” where he officially declared a 10% tariff on all imported products, a 54% tariff on Chinese products, a 46% tariff on Vietnamese goods, a 20% tariff on EU products, and a variable tariff on products from other countries.

President Trump, known as the “king of dealmakers,” believes that with the economic strength of the United States, he can negotiate cooperation from the world in various sectors like steel, soybeans, and even war. He believes that through negotiation, the rest of the world may comply with the US due to its economic prowess. While China has responded fiercely with countermeasures, Trump has ramped up the pressure, imposing an additional 50% tariff on Chinese products on April 7, gradually raising it to 104% and then to 145%. President Trump believes that China is “eager” to negotiate but has not yet mustered the courage to make the call.

President Trump not only increased tariffs but also redefined the calculation methods, factoring in the trade deficit of a country with the US, halving it, and adding a 10% lower limit. To put it into perspective, Vietnam had an average tariff rate of only 5.1% before this. China had an average tariff rate of 3% in 2024. However, Trump’s strategy aims to turn the trade deficit into leverage, compelling other countries to either reach an agreement or pay tariffs.

Game Theory sheds light on the situation, illustrating a scenario akin to the famous “prisoner’s dilemma.” In this game, the outcome depends on whether both parties cooperate or defect. Cooperation entails low tariffs, no dumping of cheap goods flooding the market, and no currency manipulation (maintaining fair exchange rates).

In a scenario of cooperation, trade flows freely, costs decrease, leading to economic prosperity and benefits for consumers, businesses, and job opportunities. Both parties benefit, resulting in a win-win situation.

However, when one party deviates by imposing high tariffs, export subsidies, and currency devaluation to violate fair trade principles, it can gain profits at the expense of the other party. Retaliation may lead to both sides levying tariffs, causing a surge in prices, trade contraction, and mutual losses.

The challenge lies in how to resist the temptation of short-term gains and maintain a state of cooperation. Establishing credible threats can compel both sides to cooperate rather than destruct in a mutually assured manner.

President Trump and his team do not believe that the US economy and other countries’ economies hold equal footing. Trump claims that only 25% of his tariffs will lead to price increases in the US, with foreign exporters bearing the rest of the burden. He believes, and hopes his adversaries will also believe, that the costs of non-compliance for foreign countries far exceed those for the US.

President Trump’s viewpoint, illustrated in Figure 3, portrays the US having a greater influence in trade disputes. In Trump’s version of the “prisoner’s dilemma,” regardless of cooperation or defiance, the US sustains lesser losses and higher gains. This explains why Canada and Mexico renegotiated swiftly under threat. Trump firmly believes that other countries concerned about economic repercussions would adjust their stance before the US.

Currently, President Trump plays the role of the “defector,” asserting that the US can withstand challenges that other countries cannot. However, China emerged as an early defector in this dilemma, signing cooperation agreements with the World Trade Organization as early as 2001, reducing tariffs from 15.3% to 3.0% by 2024. Yet, beyond tariffs, China implemented tactics like subsidies and dumping of products entering the US market, leading to anti-dumping duties of 122.5%. The US lost 372,700 jobs over the period from 2001 to 2018 solely in primary metals, machinery, and metal manufacturing industries due to the expanding trade deficit with China.

China’s intellectual property theft is well-documented. A report by the US House Homeland Security Committee estimated that China’s IP theft cost the US between $300 billion and $600 billion annually, translating to $4,000 to $6,000 in losses per American household. Additionally, a survey by a leading financial officer in 2019 revealed that one in five companies reported IP theft by China within the past year, while one in three companies faced such incidents within the last decade. Simultaneously, the USTR detailed in the “2023 National Trade Estimate Report” how China’s digital trade barriers weakened US companies’ ability to move data across borders.

Although Chinese officials denied accusations of currency manipulation, the yuan-dollar exchange rate hit a 19-month low on April 8 at 1 US dollar to 7.2038 yuan, coinciding with escalating trade tensions between the two countries.

China’s fury is palpable, vowing to fight until the end. Last week, China retaliated with a 34% tariff on US goods, escalating to 84% this week and cutting back rare earth exports.

In 2024, China exported $439 billion to the US, accounting for 2.38% of China’s GDP, while the US exported $143.5 billion to China, representing only 0.5% of the US GDP. Although China’s exports to Russia increased to $237 billion in 2024, it couldn’t substitute for the US market; the US’s $23 trillion consumer market is irreplaceable.

China’s domestic demand of $9.95 trillion pales in comparison to the US. Despite President Xi Jinping’s $1.3 trillion stimulus policy, which accounts for only 54% of GDP, it is insufficient to cover the gap. Moreover, demographic decline adds economic pressure. China’s population decreased by 850,000 in 2022, followed by 2 million in 2023 and 1.4 million in 2024.

President Trump aims to bridge this gap, leveraging the consumption-driven US to outstrip Chinese exports. While China is catching up defiantly, a strategic change could be its only way out.

The market is currently experiencing severe disruptions. After President Trump announced the imposition of tariffs, the Nasdaq Composite Index plummeted significantly: on April 7, it dropped by 5%, followed by a further 2.15% decline on April 8. This downturn led to a 12% drop in the S&P 500 index over four days, nearing bear market territory.

However, after Trump announced a suspension of tariffs on many countries (excluding China) for 90 days, the S&P index surged by 9.5% on April 9, marking the largest gain since 2008, with the Nasdaq index rising by 12.2%, the highest increase since 2001.

China constitutes the core of the global supply chain, with Chinese-manufactured products occupying 78% of US imports of smartphones, 79% of laptops and tablets, and 90% of gaming consoles. Consumption electronics comprise a significant portion of the $439 billion worth of imports from China to the US in 2024.

Critically, transitioning supply chains away from China is not a swift process. While there aren’t clear figures quantifying the US’s overall exposure to China, Deloitte, one of the Big Four accounting firms headquartered in London, indicates that establishing new production capacities like building new factories typically takes two and a half to seven years. Using Apple as an example, due to ecosystem entrenchment and technology shortages elsewhere, it may take 5 to 10 years for Apple to shift a substantial portion of iPhone production outside China.

President Trump’s proactive and radical tariff strategy aims to pressure the Chinese regime, yielding direct market responses and potential disruptions in the supply chain mirroring the trade tensions of 2018.

President Trump’s tariff measures serve both economic and psychological purposes, akin to a high-risk game of brinkmanship. As of now, the US and China have yet to reach an agreement to halt the trade war.

China took the first step by violating trade norms, prompting a counterattack from President Trump. China retaliated, prompting a stronger response from Trump. Are we heading towards Trump’s version of game theory, where both sides betray each other resulting in mutual losses?

Reflecting on history, we’ve witnessed similar scenarios before. In 2018, during his first term, President Trump initiated the US-China trade war, imposing a 25% tariff on $50 billion worth of Chinese goods, targeting industries related to China’s industrial policies.

By 2019, this figure surged to $250 billion, with additional tariffs on an extra $300 billion of Chinese goods, totaling approximately $550 billion. China retaliated by imposing tariffs on major US export goods. US soybean sales plummeted by 75%, dropping from $12.3 billion in 2017 to $3.1 billion in 2018, causing significant losses for American farmers.

Facing mounting pressure, China signed the Phase One trade agreement in January 2020, committing to purchase an additional $200 billion of products from the US over two years. However, the current gamble is on a larger scale, with China’s economy being softer, and the US’s tech supply chain being more diversified than ever. The 2018-2019 trade war showcased President Trump’s brinkmanship, and this time he believes the gamble is worth it.

The current trade conflict has transcended the US-China bilateral dispute, evolving into a shift in the global trade landscape. Vietnam is the first to seek change, eager to ease tensions by increasing imports of US goods and requesting a 45-day delay in tariff implementation.

As per the Trump administration, over 75 countries, including Japan, South Korea, and India, are queuing to negotiate with the Trump government.

The EU’s response is multifaceted. The European Commission proposed a “zero-for-zero” tariff agreement, eliminating industrial product tariffs between the US and the EU. The EU remains open to negotiations but is not stagnant. On April 9, EU member states are expected to approve the first wave of tariffs, imposing a 25% tariff on products like motorcycles, poultry, clothing, and fruits. Moreover, they are exploring strategic partnerships to diversify trade relations and reduce dependency on US imports.

President Trump’s lightning trade strategy appears to be on the right track: penalizing trade deficit practices, driving trade negotiations, and resetting the global order. To some extent, this strategy is proving to be effective. Countries are scrambling to seek equity splits, make concessions, or agree to temporary ceasefires.

Whether in textbook form or in Trump’s version, game theory emphasizes that preserving friendliness in the face of violations by others is a losing hand. President Trump’s gamble is to reset negotiations using brinkmanship and restore equilibrium. This tactic combines former President Richard Nixon’s “madman theory” and President Ronald Reagan’s “we win, they lose” theory, using tariffs rather than tanks. We believe that President Trump is right. This might be the boldest trade policy adjustment of our time.

[End of the rewritten and translated article]