* The Japanese version of this report can be found here.
Understanding Donald Trump’s Trade Policy
The charge that the Trump administration is launching an assault against free trade assumes that a free trade system existed prior to Trump regaining power. The reality is that free trade has never really occurred. The existing system is an evolving and messy patchwork of tariff and non-tariff protectionist measures imposed by all countries to varying degrees under World Trade Organization (WTO) rules and principles—what some soothingly call the global economic rules-based order. The question is: Why did previous administrations broadly support this messy arrangement for decades, and why is Trump now seeking to upend it?
The answer is that many Americans tolerated and celebrated the previous system because it lowered the cost of goods for consumers and inputs for firms, which was trade’s purpose and virtue above all other considerations. Such a perspective remains intuitively seductive. It is based on the idea of competitive advantage, which can be traced back to eighteenth-century economists such as Dvid Ricardo. According to this framing, countries export what they are good at producing and import those goods and services that others can produce better or cheaper. In general terms, the freer the trade the better off everyone becomes.
This theory and logic do not fully resonate with the Trump administration or a significant number of Americans. Though the administration does not necessarily dismiss the theory, the White House seems to view it as limited and incomplete. According to the administration, the long-standing anti-tariff mindset elevates and prioritizes consumers’ short-term interests above all else in a way that is increasingly detrimental to society and the national interest. As the reasoning goes, such an overarching focus on consumer welfarism has a cost. Free trade is disinterested in whether other needs of the community and nation are advanced.
For the current administration, cheap and reliable energy production and manufacturing remain essential to the long-term prosperity and security of all large nations and complex societies. Presumably, this is because energy is the lifeblood of almost all economic activity, while making things (not just providing services) is the foundation for industrial resilience. After all, the US was victorious during the two world wars because it could quickly transition and transform into a wartime economy to produce high amounts of armaments and other necessities.
The Trump administration might well argue that economists railing against tariffs are overly wedded to maximizing consumerism in the immediate term and have lost sight of the national and social importance of making things. Indeed, supporters of Trump’s trade policies can point to no less an authority than Adam Smith, who argues in The Wealth of Nations that “some burden upon foreign (entities) for the encouragement of domestic industry” is appropriate when doing so is required for national security 1. In the eighteenth century, this presumably referred to things such as ship sails and gunpowder. In the modern world, defense and national security cover much more, from critical minerals and steel to industrial chemicals and AI data centers. Additionally, the COVID-19 pandemic revealed that many other sectors are critical.
1 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Methuen, 1776), chapter 2.
Manufacturing is also essential for innovation. For example, in the case of Taiwan, it was not the invisible hand but a deliberate policy decision that enabled the country to lead the world in semiconductor fabrication. Such policies lead to other supposedly “natural” advantages. In contrast, a country cannot easily create clusters of innovation if it does not produce real goods. Therefore, the reindustrialization of America and revival of manufacturing and innovation appear to be the driving force behind Trump’s trade policy, which uses tariffs to give domestic producers an advantage in the US market.
The administration concedes that its tariff strategy will fail if it doesn’t lower costs and increase efficiency in other areas. Therefore, it is rolling out policies related to energy, deregulation, industrial relations, and taxation to assist and incentivize American-based firms on the supply side.
In summary, the primary motivation of Trump’s tariffs is to fast-track American reindustrialisation. His view is that much of the world (especially Asia) has designed economies that prioritize production for export to America while suppressing domestic consumption and stifling the ability of American-based producers to sell goods into these Asian economies. In his view, Japan pioneered this approach, but it has been adopted by China which has massively increased the scale of this ‘unfair’ arrangement vis-à-vis America.
In this context, trade surpluses with America provides him evidence of such alleged exploitation occurring by Asian economies. Therefore, reducing the trade surplus vis-à-vis America is an indication that such exploitation is being reversed. However, it is American manufacturing industrialisation that primarily drives Trump’s trade policies.
The Tactics of Trade Negotiations with Trump
The above provide the structural or intellectual drivers of Trump’s trade policies. General tariffs of 10-15 percent is likely to be a permanent feature of this Trump term, and perhaps beyond that.
Additionally, these structural or intellectual drivers exist alongside the demands of domestic politics. These political imperatives determine some of the tactical elements intrinsic to the success or failure to conclude trade deals to secure some relief from the Liberation Day ‘reciprocal tariffs’ which will shortly snap back into place after the 90 days pause offered by Trump.
Regarding the political imperatives for Trump, many in the Republican Party are nervous about the administration’s reliance on tariffs even if they agree with the need for rapid American reindustrialization. For this reason, the administration needs evidence that major trading partners of the US are prepared to offer concessions that they might not have otherwise offered if there were no Liberation Day tariffs hanging above them. This is the sentiment behind Peter Navarro’s comment back in April that Trump will not only serve as the chief negotiator but will aim for “90 deals in 90 days”. 2
This offers a glimpse into the pressure that Trump and his administration is under to forge ostensibly favorable deals for the US. As the self-appointed chief negotiator, Trump is under considerable pressure to conclude and announce deals with major trading partners that are ostensibly in America’s favour. He needs these to justify the imposition of reciprocal tariffs in making the claim that these tariffs have brought immediate success and is part of a successful negotiating strategy.
As the self-appointed Chief Negotiator, Trump is also keen to demonstrate that he has earned and continues to enjoy the respect and reverence of counterparts, namely other world leaders who presumably play the role of Chief Negotiator for their countries in dealing directly with trump.
This Trumpian focus on individual leaders reaching out to Trump to conclude a deal that advances America’s trade and economic interests has become one of the few pathways to success when dealing with Trump on this issue. For example, regarding key benefits for the United Kingdom following its deal with the US:
- UK car manufacturers can now export to the US under a reduced 10% tariff quota.
- The 10% tariff on goods such as engines and aircraft parts have been removed with a US commitment to maintain them at 0%.
Prime Minister Keir Starmer demonstrated a successful tactical approach. He made a point of personally courting Trump in conducting multiple meetings with Trump in ostensible support of Trump’s trade agenda. Starmer treated Trump as his most important and consequential counterpart.
It is notable that Vietnam’s General Secretary To Lam did similarly, with significant success. The Vietnamese leader has held multiple phone calls with Trump since April. For Trump, this was seen as a public and personal demonstration of personal respect and reverence for the American President.
Moreover, the UK and Vietnam gave Trump specific concessions to allow the latter to point to a successful outcome for America of his trade and tariff policies. For example, Trump boasted about the deal with Vietnam that there were now zero tariffs on American imports. The details of this are still ambiguous and it is also unclear the extent to which this will benefit American exporters. Nevertheless, it gave Trump the appearance of the negotiating ‘victory’ that he is after.
Additionally, these two leaders realized that seizing the ‘first mover’ advantage offered tactical benefits. Trump was never going to achieve ’90 deals in 90 days’. However, he remains under pressure to achieve some notable agreements before the Liberation Day tariffs pause is over. With these leaders getting in before other leaders, they significantly increased their chances of concluding meaningful agreements with the US during the 90 day Liberaiton Day tariff pause.
2 See “Trump trade team chases 90 deals in 90 days. Experts say good luck with that,” Reuters, April 12, 2025, https://www.reuters.com/business/trump-trade-team-chases-90-deals-90-days-experts-say-good-luck-with-that-2025-04-12/
Lessons for Japan
To Japan’s credit, Tokyo realized from the beginning that the primary objective of Trump’s tariffs has been to fast-track American reindustrialisation. In February, Prime Minister Shigeru Ishiba offered to help increase Japanese foreign direct investment (FDI) into the US to over US$1 trillion and for Japan to support US-led projects such as the ‘Stargate Project’ to help position the US as the Artificial Intelligence leader in the decade ahead. This early burst of economic diplomacy from Ishiba increased optimism that the US-Japan bilateral relationship was on strong foundations and Japan would receive special carveouts and privileges vis-à-vis Trump’s tariff regime.
To be sure, Japan began from a stronger position than many other US trade partners. However, countries such as the UK and Vietnam have played a better tactical game than Japan.
In particular:
- Japan should have realized that the countries that moved first and fastest in negotiating a deal with the US will get the best outcomes. In contrast, the ‘wait and see’ approach is the wrong tactical one. This is due to Trump needing immediate evidence of trade deals and what he is prepared to offer will be worse as more time passes.
- Trump sees himself as the Çhief Negotiator’. Therefore, negotiation must be led by the head-of-government rather than senior bureaucrats and officials. Negotiations that are being led by a country’s head-of-government is a sign of personal and institutional respect and reverence for the American President in the latter’s role as Chief Negotiator.
- Trump’s key trade officials (e.g., Secretary of Commerce Howard Lutnick, Secretary of Treasury Scott Bessent, and US Trade Representative Jamieson Greer etc) have limited personal and institutional authority to offer concessions. Instead, they seem to be waiting for Trump to signal to them as to the priority economies with which the President wants to conclude a deal before the officials can take the lead. Therefore, ‘getting to yes’ with the US on a trade deal requires the head-of-government to take a leading and active role in the negotiations.
- The huge Japanese FDI entering into or promised to America were already factored into the pre-existing economic relationship before the Liberation Day trade negotiations. Indeed, it seems that Trump is focusing on cars and rice as the sticking points because he has identified these as sectors where Japan can offer a compromise which Trump can claim as a ‘victory’. Moreover, Japanese negotiators overtly beginning with the position that American 25% tariffs on Japanese cars was inacceptable might be a tactical mistake. Beginning that way as a negotiating tactic might was tactically risky and might well have backfired.
The Way Ahead
- Japan is running out of time. The US is only likely to offer Japan a short extension of a few weeks to negotiate a deal to ‘reduce the trade surplus and assist with American reindustrialization’ if there is direct intervention and involvement by Prime Minister Ishiba.
- For political reasons, Trump needs to receive a Japanese concession that Japan was not prepared to offer before – whether this be about agriculture or cars. As Chief Negotiator, Trump needs to be able to claim success during any negotiation and agreement. The key is for Japan to offer a concession to the US that enhances rather than harms Japanese interest. For example, there is a short-term inadequacy in the domestic supply of rice in the Japanese market. Japan might consider temporary concessions to American rice producers to increase the time for Japan to negotiate a more comprehensive agreement with the US. This will be a ‘success’ for Trump and also a ‘success’ for Japan in assuaging short-term supply issues.
- There will be a separate but parallel conversation around levels of Japanese defense spending. Japan should not link increases in Japanese defence spending as a ‘concession’ to Trump. Instead, the Japanese leader should link increased defence as evidence of Japan being led by a ‘proactive’ leader in the same way Prime Minister Starmer has done in the UK. Indeed, Trump is more generous as an ally if he sees a leader as someone who is proactive and bold. For Trump, a bold leader who takes personal and political risks to walk on a common journey with Trump will be rewarded.
