The rollout of Liberation Day was so chaotic that hardly anybody noticed that the plan, in essence, made sense. The Trump administration’s decision to impose high reciprocal tariffs on countries that run a bilateral trade surplus with the United States, alongside a global 10% tariff on all imports, was the victim of about a dozen highly questionable process choices, all of which added up to a week of white-knuckle panic in financial markets. The tariffs should have been phased in. The messaging should have been unified. And the end-goal should have been clearly communicated.
The commentariat has focused on these points to the exclusion of the real story, which is that the United States has successfully triggered the realignment of the global trading system. Liberation Day’s advantages ultimately transcend its missteps: it has created a once-in-a-generation opportunity to change the rules of a game that has systematically disadvantaged the United States.
Through the noise, voices in the administration laid out the problem. On April 7, Council of Economic Advisors Chairman Stephen Miran explained that the existing trade system forces the United States to provide costly “global public goods” to the world. Backed by a U.S.-financed security umbrella, our trading partners are able to use the dollar as their reserve currency, which artificially strengthens our currency and makes imports cheaper relative to domestically produced goods. Miran wrote:
While it is true that demand for dollars has kept our borrowing rates low, it has also kept currency markets distorted. This process has placed undue burdens on our firms and workers, making their products and labor uncompetitive on the global stage, and forcing a decline of our manufacturing workforce by over a third since its peak and a reduction in our share of world manufacturing production of 40%.
With an artificially strong currency, the U.S. came to occupy a “buyer of last resort” role in the global trading economy, absorbing the excess production of our trading partners and both incentivizing and allowing them to undertake industrial policies that subsidized their export sectors at the expense of U.S. producers. On the same day as Miran’s remarks, Senior Counselor for Trade and Manufacturing Peter Navarro described these policies and explained that they extend far beyond our trading partners’ high tariffs:
Even worse than [their tariffs] is the barrage of non-tariff weapons foreign nations use to strangle American exports, unfairly boost their shipments to the US, and wall off their own markets. These tools include currency manipulation, value added tax distortions, dumping, export subsidies, state-owned enterprises, IP theft, discriminatory product standards, quotas, bans, opaque licensing regimes, burdensome customs procedures, data localisation mandates and, increasingly, the use of “lawfare” in places like the EU to target America’s largest tech firms.
Added together, the effect of these burdens is American deindustrialization and a $1 trillion annual trade deficit. We are hemorrhaging middle-class jobs, market share in key industries, and process engineering know-how that drives future innovation. This is not an inevitability of economic modernization or the fair outcome of market competition. It is the result of a global trading system that forces us to absorb the distortive, state-directed policy preferences of our trading partners. Anyone who calls this “free trade” simply hasn’t been paying attention.
The Liberation Day tariffs will allow us to definitively rebalance this system. From the outset, it was clear that the reciprocal tariffs were temporary in nature and designed to force negotiations between the United States and its trading partners. The signal was the administration’s treatment of Canada and Mexico, which were spared reciprocal tariffs and instead afforded duty-free access to the U.S. market through the USMCA trade agreement. Seeing that a deal was possible, other countries opened negotiations and started offering concessions.
However, stress in the bond market outpaced these negotiations, compelling Trump, in his telling, to announce a 90-day pause in the implementation of the reciprocal tariffs. This was read as Trump “blinking” or “admitting defeat.” But while the bond market may have dictated the timing of the announcement, the U.S. in fact finds itself holding the strongest cards in negotiations that had always been anticipated and that will now ensue.
The goal of these negotiations is to ring-fence China, the only country for which reciprocal tariffs were not paused and the world’s biggest abuser of the global trading system. Indeed, the context for Canada and Mexico’s exemption from the reciprocal tariffs was not their balanced trade with the U.S.—we have trade deficits with both countries—but rather ongoing discussions concerning Canada and Mexico matching the U.S.’s tariffs on China to build what Treasury Secretary Scott Bessent has called “fortress North America.” If Canada and Mexico exclude Chinese goods on similar terms as the United States, these countries won’t be able to serve as a backdoor for China to access the American market, strengthening USMCA and providing a model for other countries hoping for similar treatment.
After successive rounds of retaliation, U.S. tariffs with China now stand at 145%. We have effectively begun decoupling from China, and offered a fork in the road to the rest of the world: do you want to negotiate balanced trade with the United States, or be absorbed into China’s orbit?
Plenty of commentators seem to think that most major economies will choose China. Financial Times columnist Janan Ganesh writes that the tariffs will push even pro-U.S. economies toward China, as “one Maga goal (the containment of China) contradicts another (“liberation day”).” The editors of The Economist write that Trump’s “wanton self-harm and general destruction” may “end up making China great again.” And the Washington Post sounds the alarm that China is “offering trauma bonding with U.S. partners” as it “tries to extend its influence and take center stage in a new trade order — rebuilt without Washington.”
China is likely incapable of building a new trade order. Fears that China will overtake the United States as the world’s preferred trading partner reflect a failure to understand how the global trading system works. The United States buys, and China sells, and the two roles aren’t simply reversible. Advanced economies have built export-driven manufacturing sectors designed to sell to the United States. China has most enthusiastically adopted that strategy, but so have Japan, South Korea, Taiwan, Southeast Asia, Mexico, and the EU, most of which run structural trade surpluses as a result of boosting their export sectors. Indeed, manufactured goods exports alone make up almost 15% of the EU’s entire GDP, more than three times the U.S. share.
These sellers need reliable buyers, and China cannot be that buyer. Its economy produces far in excess of domestic demand, seeking massive trade surpluses by flooding its trading partners’ markets with subsidized exports. China has no demand room to absorb exports diverted from the U.S. market. A prescient 2024 report detailed the threat of Chinese overcapacity:
Beijing is desperately looking to rebalance the economy away from the infrastructure and property sectors and toward new growth drivers. Yet in the absence of a clear strategy to prop up consumption, this means supporting the manufacturing industry—particularly in emerging sectors such as renewable energy and electric vehicles—as a core engine of growth . . . . China’s growing manufacturing surplus is not only a problem for the US … In fact, China’s trade surplus with G7 countries grew by a third between 2019 and 2023 while it more than tripled with developing economies, setting a daunting barrier as they try to nurture their own industrial sectors.
As the report alludes, China could attempt to support domestic consumption at the expense of its export sector. China will likely find this an impossible task. For decades, China built a production-centered economy by transferring wealth away from households and toward investment in manufacturing, resulting in high household savings, low consumption, and a mountain of risky loans to industrial firms. Now, with the loss of the U.S. export market, Chinese producers are under maximum pressure—meaning that the consumers who work for these firms will tighten their belts, rather than increase their consumption. As a Chinese analyst said to the New York Times, “the economy is all integrated, and producers are also consumers. It’s all the same people.” China will likely need to employ massive fiscal stimulus just to survive, let alone replace the U.S. demand role in the global economy.
Even before Liberation Day, the world was reeling from all-time-high levels of Chinese industrial exports. For example, in the space of just four years, China went from being an insignificant source of auto exports to the single largest auto exporter in the world. Between the COVID-19 pandemic and Liberation Day, Chinese exports of a wide range of manufactured products—from steel to semiconductors—broke records, placing firms in Asia and Europe under unprecedented stress. Countries were belatedly figuring out what the United States had already painfully realized: free trade with China would force the closure of the industries that anchored their economies. Accordingly, in 2024 and 2025 many of these countries began rolling out anti-China tariffs of their own accord.
Fears that the world might choose to prioritize trade relations with China appeared to be bolstered by reports that the EU was negotiating with China to drop tariffs on Chinese electric vehicles. But the EU auto industry had long opposed these tariffs as a threat to their manufacturing operations in China. EU tariffs were set at relatively low levels that were survivable for Chinese automakers exporting to Europe, but presented real risk to thinner-margin European companies manufacturing in China for export back to the EU. Ultimately, the EU appears to be seeking a minimum price agreement in lieu of tariffs. This move is about shoring up Europe’s China-exposed firms, not a longer-term alliance with China. In fact, the EU appears more concerned about diversion of low-priced Chinese goods away from the U.S. and toward Europe, and is seeking cooperation with China to monitor their flow.
Essentially, much of the world was already converging on the need to ring-fence China. And now that the United States has dramatically increased its own tariffs on China, this need has become even more pressing. Having lost access to U.S. demand, Chinese exporters are now in desperate need of new markets. Europe, Asia, and Latin America now confront the likelihood that Chinese goods once destined for the United States will be diverted into their markets, wreaking havoc on prices and putting their producers out of business. The world is thus far more likely to negotiate a new basis for its trading relationship with the United States, which can provide demand, than with China, which can provide only greater supply. The Liberation Day negotiating platform is ready-made.
This gives the United States the cards. As Miran noted:
Countries that run large trade surpluses are pretty inflexible—they can’t find other sources of demand to substitute for America’s. Instead, they have no choice but to export, and America is the largest consumer market in the world. By contrast, America has plenty of substitution options: we can make stuff at home, or we can buy from countries that treat us fairly instead of from countries that take advantage of us. This difference in leverage means that other countries end up bearing the cost of tariffs.
Now the negotiating table has been set. In addition to adopting a uniform policy to exclude China’s heavily distorted exports, any new trading bloc centered around the United States should be built on balanced trade. The large, persistent trade deficits that the United States has run for 30 years aren’t supposed to be possible in a standard economic model—U.S. imports should weaken our currency, making our exports more competitive, while trade surplus countries should see their demand increase and imports rise over time as a result. In a reordered trading system, the United States—and likely other countries—running deficits above certain volume and duration levels would be permitted to tariff imports or tax financial flows until the deficits shrink, at which point the tariffs would come down proportionately.
This is what makes the global 10% tariff so important as a durable policy that drives reshoring over the longer term. Flat tariffs are often criticized for being “non-strategic,” applying equally to seemingly low-value products like toasters and to products that can’t be made in the U.S., like avocados. But its industrial policy advantages are enormous and cost-justified. A global tariff cannot be circumvented, gamed, or avoided. It automatically addresses the structural source of the U.S. trade deficit—our absorption of global imbalances caused by foreign subsidies to their export sectors—by making it impossible for the source of those imbalances to simply shift to a different exporter. It is most impactful for infant industries at the steep end of their cost curve, which are precisely the industries we should try hardest to retain. Meanwhile, a global flat tariff leaves market dynamics intact, avoiding the problem of picking winners by putting all industries and firms on the same competitive plane.
And of course, the revenue that such a tariff would generate—likely around $300 billion annually—is not lit on fire. Instead, it can fund tax cuts that enhance the competitiveness of American firms. Meanwhile, our 145% tariff on Chinese imports can offset the cost to businesses that must adjust their source of supply away from China. At the same time, these tariffs create a powerful incentive for exporters to tunnel under the tariff wall and invest in U.S. manufacturing. Indeed, that was exactly what the Japanese auto industry did when the Reagan administration enforced an export quota in the 1980s, resulting in an auto manufacturing renaissance in the American South.
In a reformed global trading system, we will still import plenty from overseas. But those imports won’t reach our shores because our trading partners employed distortive industrial policies to make their goods cheaper relative to American producers. Instead, balanced trade policies will allow true comparative advantage to determine who makes what. And in such a world, the United States may find that its capabilities are virtually unbounded. Liberation Day presents an opportunity to create that world. It is now up to the administration to land the plane.
