Many Americans probably find this rationale compelling. After all, what’s wrong with putting national interests first?
In fact, there are many problems with this approach. For starters, the administration’s thinking ignores the likelihood, indeed the virtual certainty, of retaliation. Once trade partners respond in kind (which usually happens immediately), the gains from unilateral tariff increases will diminish.
True, the Trump administration is confident that the country’s economic leverage is sufficient to preserve its advantages despite countermeasures. Yet a remarkable consequence of recent policy decisions is that all of America’s major trading partners have united against it. Negotiating with a small economy like Colombia is one thing; but it is quite another matter to confront retaliatory action from China, the European Union, and America’s US-Mexico-Canada Agreement (USMCA) partners at the same time.
These dynamics underscore the very problem that multilateral trade agreements – first under the General Agreement on Tariffs and Trade, and later under the GATT’s successor, the World Trade Organisation – were designed to address.
As economists Kyle Bagwell and Robert W Staiger demonstrated in a seminal 1999 paper, “An Economic Theory of GATT,” trade agreements exist to solve a classic prisoner’s dilemma: large economies have an incentive to impose unilateral tariffs to improve their terms of trade, but if all countries engage in such behaviour, the result is a race to the bottom that leaves everyone worse off.
The postwar trading system was premised on the assumption that countries naturally seek to maximise their own economic welfare. Yet in recent years, US trade policy has increasingly been driven by a different motive: to impede the economic ascent of competitors, especially China. This goal has taken precedence even over securing prosperity for US citizens. Seen through this lens, Trump’s current tariff strategy looks more coherent. It may not benefit the US economy, but that is beside the point. The purpose is to hurt others.
This shift raises a fundamental question. In a world increasingly shaped by geopolitical rivalry, is the existing multilateral trade system obsolete? Perhaps surprisingly, a recent working paper suggests that it is not. Unless the US (or any other major economy) assigns zero value to its own welfare, there remains a strong incentive to negotiate and co-operate internationally.
Even when countries are motivated not only by absolute economic welfare but also by their relative standing (a mindset that often leads to policies designed to disadvantage rivals), there is still a case for negotiations. Countries have an interest in pursuing “Pareto improvements”: outcomes that enhance their own welfare without necessarily worsening their competitor’s position. This is precisely what multilateral agreements facilitate. Co-operation would make no sense only if countries pursued Pyrrhic victories that inflicted harm on rivals regardless of the cost to themselves.
While the logic of co-operation persists, the institutional framework underpinning global trade must adapt. The same working paper suggests that we are witnessing an “unravelling” of the liberal trade order, a necessary reset that allows for renegotiation under new geopolitical realities. If so, today’s escalating trade tensions could be viewed as a painful but temporary transition toward a revised multilateral framework that better reflects the evolving balance of power.
This interpretation leaves room for cautious optimism. If the transition is managed effectively, it could lead to a new, politically viable global trading system. But there are also significant risks. Protectionism and economic nationalism will inflict long-term damage if they spiral out of control. If trade policy becomes purely an instrument of geopolitical struggle, the space for co-operation could disappear altogether. History is full of unintended consequences. One can only hope that today’s leaders recognise the stakes before it is too late.
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