How Can One Deal with the United States That Suddenly Acts Mysteriously Against the Entire World?

By Masakazu Toyoda

Just a few months after the second Trump administration was established, it began tariff negotiations with all the countries it trades with. By early August, the UK agreed to a 10% mutual tariff, Japan and the EU agreed to 15%, and Indonesia and Thailand agreed to 19%. Meanwhile, Brazil was hit with a 50% tariff, while Canada, Mexico, India, and many others are now subject to tariffs ranging from 25 to 50%. China faces a 34% tariff, with negotiations still ongoing.

The administration's declared objectives are to eliminate the trade deficit and revive manufacturing, but the rationale behind their actions is highly unclear and described as a mysterious logic. It seems to defy the generally agreed upon economic concepts of trade principles.

First, it is inconsistent with one of the most important principle of the GATT/WTO system that was established by the United States at the center after World War II. I am referring to the guarantee of equal trade opportunities which is a principle related to the "most-favored-nation treatment", meaning that anything granted to any country must be extended to all other member countries. It seems that agreements, such as the WTO/GATT (or NAFTA for Canada and Mexico) that were reached many years ago no longer have any meaning for the present U.S. administration and can be set aside at will. What about the currently agreed upon tariffs discussed above? How long should we expect them to stay in place?

Second, looking at the current state of the global economy, the United States has the highest growth rate among advanced countries and is even still considered as the "sole superpower." Looking at 2024, the United States has the highest growth rate among G7 countries at 2.7%, followed by Canada at 1.5%. Japan ranks sixth at 0.08%, and Germany ranks seventh at -0.2%.

Third, it is said that despite its strong economic performance, the United States has slowly developed a divided society with an ever widening gap between the rich and the poor. For example, the so-called "Rust Belt," once a thriving manufacturing region in the U.S., has been lagging behind in terms of development (in part due to cheaper labor costs in other countries). Using the "World Inequality Report 2022" let's compare Japan against the world's largest economy, the United States. In the U.S., the average wealth per adult is estimated at over 40 million yen, which is 1.6 times that of Japan. The paradox of the world's largest economy lies in its wealth distribution by income bracket. For instance, those with earnings at the top 1% holds 2.2 times more wealth than those in the same group in Japan. The top 10% holds 1.9 times more, and the next 40% holds 1.2 times more. However, the poverty level of those with earnings in the bottom 50% is particularly severe, as they hold about 0.4 times less wealth than in Japan. In other words, those in the top 50% earnings in the US are richer than in Japan, while the other 50% is poorer than in Japan.

Finally, what is most puzzling is that the US government seems unconcerned about the fact that many international economic organizations, including the IMF, have warned that the US will be most adversely affected by increasing import tariffs. According to the IMF's April forecast, the global economy for 2025 is expected to decline by 0.5% to 2.8% from 2024, with the United States declining by 0.9% to 1.8%. Among the G7 countries, Canada is expected to see a 0.6% decline, while Japan and the United Kingdom are projected to decline by 0.5%. In the most recent forecast for 2025, released last month, the global economic outlook was revised upward by 0.2% to 3%, with the relative relationships between countries unlikely to change significantly. It is said that import prices will surge, leading to stagflation in the United States.

There is no doubt that the US is recognized both economically and in terms of security as an important country for the well being of the entire world. This is why many countries have followed through with tariff negotiations, and why Japan and other countries have agreed to expand investment in the US.

However, most countries are unlikely to be satisfied with the current situation, which is inconsistent with WTO/GATT rules. In other words, they feel the need to rebuild a trade order based on rules that should not be broken. At the center of this effort are Japan and the EU. As I have mentioned repeatedly in earlier PN, it is difficult to achieve this under the current consensus-based approach of the WTO. It would be far more effective to form some kind of economic partnership and create a new order using the CPTPP and the EU, as they offer higher standards than the WTO.

A key issue in this context is how to address China's inherent or intrinsic "economies of scale." It is also necessary to address China's massive subsidies and over-production. China is the largest contributor to the U.S. trade deficit, amounting to $320 billion. This is 3.6 times the U.S. trade deficit with Germany, which ranks fourth, and 4.4 times that with Canada and Japan, which rank sixth and seventh, respectively. China joined the WTO in 2001 and, by 2023, its GDP had grown 12 times reaching almost two-thirds of the US GDP.

Rules have yet to be established to address the unexpected externalities caused by economies of scale which may have in part contributed to the economic turmoil presently experienced in the U.S. The emergence of a "new" giant economy is forcing the U.S. to act mysteriously against the rest of the world. Even simply requiring China to comply with CPTPP rules could have a significant effect. Additional rules such as discipline for state-owned enterprises, strengthened intellectual property rights protection, e-commerce, investment rules, environmental protection, and workers' rights have already been added to the CPTPP.

Some may ask if rules could be created without the United States. I would like to emphasize that the United States is welcome to participate at any time recognizing that it no longer wishes the role of world's police officer. We simply expect it to be most respectful of adopted rules.

Masakazu Toyoda is chairman and CEO of the Japan Economic Foundation (JEF). He previously served as chairman and CEO of the Institute of Energy Economics, Japan, after having been vice minister for International Affairs at the Ministry of Economy, Trade and Industry.