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By Takenori Inoki / Special to The Yomiuri Shimbun
11:00 JST, February 7, 2025
Will the start of U.S. President Donald Trump’s second administration lead to a foundational change in U.S. trade policy? Both Japanese companies and their counterparts elsewhere in the world have strong interests in and serious fears about what will eventually happen. It is quite difficult to predict how the returning president will affect the world economic order in the medium and long terms.
One area of interest is what structural changes will occur in global trade and production as a result of the additional tariffs on exports to the United States.
Needless to say, setting higher tariff barriers means the forceful exercise of a sovereign right of a nation. But it cannot be ignored that the sovereignty of the United States is weakening. This is because mega companies with global operations have gotten around various regulations at home and abroad, and accumulated swathes of confidential information regarding national security and financial transactions. They are U.S. titans that have achieved rapid growth by accelerating industrial transformation through the development of information and communications technology.
When we think about the United States’ further tilt toward trade protectionism via additional tariffs, we cannot overlook the U.S. history of utilizing tariffs as the economic basis of governance for a long time after its foundation. Trump’s remark that “Tariff is the most beautiful word” other than “religion” or “love” doesn’t sound like a joke.
Going back to the 19th century, tariffs accounted for almost 90% of federal government revenue until the Civil War. Historically speaking, tariffs were a primary revenue source for the U.S. federal government — the United States made it possible to levy income taxes for the first time when a relevant constitutional amendment was ratified just before World War I.
During the two world wars, the U.S. government became gargantuan, to the extent that tariffs’ portion of federal budget resources decreased greatly in relative terms. Especially after the establishment of the post-World War II system for promoting free and multilateral trade under the General Agreement on Tariffs and Trade, the role of tariffs receded considerably.
Tariffs as strategic tool
Nonetheless, tariffs remained as a strategic tool for the U.S. federal government in terms of both budget revenue and trade policy. This was proven when Joe Biden’s administration succeeded the first Trump administration without any fundamental change in U.S. tariff policy.
In February 2018, the Trump administration unleashed a salvo of tariffs on imported goods, with levies of 30%-50% on imported large washing machines and solar panels. Additional tariffs on steel and aluminum were imposed on certain countries in March 2018, and in June of that year they were expanded to the European Union, Canada and Mexico. Also in June 2018, Trump surprised the world by announcing plans to slap an additional 25% tariff on $50 billion worth of Chinese goods.
The tariff policy of the administration of Biden was no different from that of its predecessor. In May 2024, Biden announced plans to double tariffs on Chinese solar cells and triple them on Chinese lithium-ion batteries for electric vehicles, as a measure to rival Trump in drawing labor union support.
Trump’s imposition of the additional tariffs described above was not based on legislation newly passed by the U.S. Congress. He applied provisions of such existing trade laws as Section 232 of the Trade Expansion Act of 1962 and Section 301 of the Trade Act of 1974, which authorize measures including the issuance of trade-related executive orders based on investigations by the U.S. Trade Representative’s office, the U.S. Department of Commerce and the U.S. International Trade Commission. This process strongly reflects the United States’ tradition of flexibly applying its Constitution as a protectionist nation.
What makes it difficult to understand Trump’s economic policies is his tactic to dramatize, like an actor, his intellectual negotiations as a businessperson. This approach can be described as a remnant of the isolationist past of the United States that is deeply rooted in the undercurrents of the U.S. political and business spheres; this is patriotic nationalism that is unwilling to correspond with changes in the times.
In 2017, shortly after taking the oath for the presidency, Trump announced the withdrawal of the United States from the Trans-Pacific Partnership, calling the TPP a potential disaster for the U.S. economy and the backbone of the national sovereignty of the United States. Trump warned that the trade agreement would result in dividing the global economy.
However, the national sovereignty of the United States has already begun weakening within itself — from a different direction. Those gigantic companies with global operations in the cutting-edge fields of information and communications technology are now wielding overwhelming political power in areas beyond individual nations’ sovereignty. As a result, they now are highly influential in those realms that governments used to exclusively control and administer.
For example, cryptocurrency — which has become possible thanks to information and communications technology — poses a threat to the currency-issuing authority of the U.S. federal government. Further, communication of data, including classified information related to national security, is reliant on undersea cable networks operated by private-sector companies.
As shown by the appointment of billionaire Elon Musk to lead the newly created Department of Government Efficiency (DOGE), the CEOs of some global mega companies have now secured increasingly great sway in U.S. politics. Musk has said he is neither Democrat nor Republican and called himself “socially liberal and fiscally conservative.” In a nutshell, that means that he has chosen to hold an important government position so he can control the government at will as a business tycoon.
Future of dollar-based order
Meanwhile, the trade war between the United States and China has the potential to profoundly change the “dollar-based order” in the medium to long term. Even though the Chinese economy is reportedly stagnant, the weakening of the dollar’s status as the world’s key currency is likely to be the greatest factor threatening the United States’ position in the world.
China and Russia appear inclined to increase the shares of their own currencies, instead of the dollar, in foreign exchange settlements, as a way of countering U.S. economic sanctions against them. Considering the risk for them of losing trade and investment due to the difficulty of accessing dollars, it would be natural for them to seek the establishment of a non-dollar denominated international settlement network.
Countries that opt to move toward strengthening the existing dollar-dominated international settlement network from the viewpoint of security enhancement are likely to keep the supremacy of the United States and that of the dollar intact. In this connection, if Washington tightens economic sanctions against China and Russia, even countries friendly to the United States may begin looking for alternatives to the U.S. currency to avert risks.
A close check of currency shares in foreign exchange transactions makes it possible to see one aspect of the issue. According to the Bank of International Settlements’ Triennial Survey of global foreign exchange turnover, the U.S. dollar’s share remained the largest in 2022, followed by the euro, the Japanese yen and the British pound, in that order. But the Chinese yuan came in fifth with a global share of 3.5% as of 2022, compared with 0.2% in 2007, or one year prior to the 2008 financial crisis.
While the United States and other major developed countries have been reducing reliance on trade with China, more attention should be paid to the fact that the Association of Southeast Asian Nations has been strengthening two-way trade relations with China.
The world’s economic order is faced with fundamental problems, which are beyond what the unilateralist Trump imagines. People like us, who are living in the days of such leaders as Trump, tend to criticize them for their “appearance of frivolity” or “lack of virtue.” We should not forget the importance of assessing their policies from a medium to long-term perspective, putting emotional opinion aside.
Instead of merely criticizing Trump as an “actor,” we need to carefully scrutinize — from the perspective of Japan’s national interests — how his trade policy will affect the world’s trade structure and economic order.
Takenori Inoki
Inoki is a professor emeritus at Osaka University, where he also served as dean of the economics department. He was a specially appointed professor at Aoyama Gakuin University from 2012 to 2016. Prior to that, he served as director general of the International Research Center for Japanese Studies from 2008 to 2012.
The original Japanese article appeared in the Feb. 2 issue of The Yomiuri Shimbun.
