IOG Economic Intelligence Report (Vol. 4 No. 4)

The latest regulatory developments on economic security & geoeconomics

By Paul Nadeau, Visiting Research Fellow, Institute of Geoeconomics (IOG)

Trump Announces Possibility of Sectoral Tariffs: U.S. President Donald Trump announced the possibility that he would impose a new wave of sectoral tariffs on automobile imports “around April 2” and 25 percent duties on imports of steel and aluminum beginning March 12. There were no details on the auto tariffs, including whether they would cover vehicles built in countries with whom the United States has a free trade agreement, like Canada and Mexico, nor is it clear under which authority tariffs would be imposed or if they’re linked to a policy goal as in the case of tariff threats toward Canada and Mexico. The steel and aluminum tariffs are modifications of the tariffs on steel and aluminum first imposed in 2018. The new action raises tariffs on steel and aluminum from 10 percent to 25 percent, removes all country exemptions and General Approved Exclusions (GAEs), adds more downstream products to tariff coverage, and creates an exemption process for imported derivative articles made from steel “melted and poured” and aluminum “smelted and cast” in the United States. Tariffs on semiconductors and pharmaceuticals have also been floated.

Trump Announces Possibility of Reciprocal Tariffs: Trump announced that the United States would implement reciprocal tariffs, directing the U.S. Trade Representative and U.S. Commerce Department to review and propose new levies on a country-by-country basis in order to rebalance trade relations, possibly around April 1. The review would require the Commerce Department and the Office of the USTR to review the tariff schedules and codes of U.S. trade relations with roughly 200 countries, in addition to reviewing other trade barriers and policies. Trump further said that countries may be exempt from reciprocal tariffs if they agree to lower their tariffs or address other trade barriers. Japan’s Foreign Minister Takeshi Iwaya met with U.S. Secretary of State Marco Rubio on the sidelines of the Munich Security Conference in Germany to ask that Japan be exempted from the tariff program.

Trump Restores De Minimis Benefits for China: Trump temporarily restored China’s access to de minimis shipping benefits on February 7, a program under which packages under a certain value may be imported into the United States duty-free, only a few days after he revoked China’s access while imposing tariffs of 10 percent on imports from China. Politico quoted Tim Brightbill, a trade attorney at the Washington DC law firm Wiley Rein, saying that “This new order appears to concede, at least for now, that the United States does not have in place the systems in place it would need to collect tariffs on the enormous and growing number of de minimis shipments each year from China”.

U.S. Treasury Department Announces New Iran Sanctions: On February 6, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions on a network shipping Iranian crude oil to China Iran’s Armed Forces General Staff (AFGS) and its sanctioned front company, Sepehr Energy Jahan Nama Pars (Sepehr Energy). The sanctions cover more than a dozen people, companies, and ships in China, India, and Iran. These are the first sanctions imposed on Iran by the Trump administration since its return to office.

Ukraine Rejects Trump’s Minerals-for-Support Offer: Ukrainian President Volodymyr Zelensky rejected a proposal from the Trump administration that would see Ukraine give control to half of the country’s mineral resources, including graphite, lithium and uranium, to the United States in exchange for past and future U.S. support. President Zelensky rejected the offer since it failed to provide U.S. security guarantees. At the time of writing on February 17, negotiations are apparently ongoing, and it is unclear whether Ukraine provided a counteroffer. The Trump administration’s offer is consistent with its efforts to acquire Greenland for its possible mineral wealth its threat to annex Canada unless the bilateral trade balance is addressed.

Analysis: A Two-Track Approach for Facing Trump

With about a month into Donald Trump’s second term in office, his administration’s approach of “creative destruction” to the global trade regime has become more clear. There was a several-hours long trade war with Colombia where the United States threatened tariffs over flights of migrants into Colombia, dramatic 25 percent tariffs were imposed on Canada and Mexico only to be paused for 30 days once both countries made promises to more fully commit to Trump’s concerns, 10 tariffs were imposed on China, universal tariffs were applied to steel and aluminum imports, reciprocal tariffs were announced, and more action is only a Truth Social post away. It’s already been a whirlwind, where any one of the above actions would be significant enough to make an impact, and taken together, it’s disorienting.

Yet governments and firms are going to have to orient themselves quickly because tariffs are going to be a feature of the Trump administration’s approach to international governance. The motivations for this approach were explained by Andrew Capistrano in the previous issue, so it’s worth extending the discussion to try to understand how governments and firms to respond to this approach.

The first step to prepare would be information. No one can or will know exactly what the Trump administration is thinking or what they’ll – that’s part of their strategy – but a little is better than none, and more is better than that. Trump is mercurial, the announcements are rapid, and the questionable legality of many of his initiatives means they may get stalled by the courts or caught up in lawsuits. The Institute for Geoeconomics has assembled a collection of Trump’s major actions which should be a reference for the coming years, and other output will be released throughout the year to help understand what’s happening.

To better understand what might happen, understanding process will be essential because that reveals where stakeholders may be able to intervene and make their concerns heard. While the Trump administration has already shown that it won’t be constrained by laws or process, the established processes are still important because it shows where potential veto points might arise and slow the process down or even block it: for example, imposing tariffs via Section 232 of the Trade Expansion Act of 1962 is fairly conventional and uncontroversial, imposing tariffs via the International Economic Emergency Powers Act has not been done before and might generate resistance, and announcing tariffs on social media effectively doesn’t mean anything other than a statement of intent.

Understanding Trump’s motivations is also important. The only concrete lesson that can be drawn so far is that the Trump administration is personalist and unrestrained – personalist in that any action is the result of Trump’s personal predilections rather than the result of a bureaucratic process as seen in most U.S. administrations, and unrestrained in the sense that the administration will act first regardless of what process permits, something that’s already been seen with dramatic effect in its approach to domestic governance, and there’s little reason to think that rules, procedures, and process will slow him down on the international stage either. Most fundamentally, Trump is looking for material value – money, resources, investments, etc. which helps explain his fascination with acquiring Greenland.

To respond to this approach, a two-track approach may be useful, focusing on Trump’s personal priorities in bilateral discussions and global and multilateral issues in discussions in other relationships. The basic approach that has worked so far has been to charm Trump directly, offer (not necessarily significant) concessions, and avoid bringing Trump personally into any disputes. For example, Trump might be a tariff hawk, but his administration contains several who are seen to be tariff doves, such as Treasury Secretary nominee Scott Bessent and Commerce Secretary Howard Lutnick, who might provide a more sympathetic year to arguments about the challenges posed by tariffs but they ultimately work for their boss, Trump, and pushing back can only go so far. Asian governments might also find dealing with Trump easier than their European counterparts. Europe and its capitals tend to take issue with Trump on both substance and on principle, while Asian governments tend to take issue on substance but less with principle, applying a kind of “ASEAN Way” approach to their relations where pragmatic concerns are central and domestic concerns are private. Countries will need to decide for themselves how much they’re going to be able to concede to the Trump administration’s initiatives and while the Trump administration has declared its interest in attracting foreign investment, particularly in the technology and energy sectors, firms will need to make additional efforts to make sure they’re sufficiently resilient to the coming shocks. This approach might not be infallible in terms of completely avoiding coercive actions, but it offers a chance to avoid the worst.

On the multilateral track, the priority should be to rely on scale and to build as much predictability into the system as possible. While unpredictability, the hallmark of Trump’s approach, increases leverage in situations of power politics, predictability allows for more equitable relationships by subjecting everyone to the same process regardless of size. Specifically, governments need to reduce uncertainty and multilateral forums can help. Redoubling on multilateralism or minilateralism may offer the best approach. The WTO might be weaker than it once was, but its processes can provide certainty and predictability against an administration determined to be as unpredictable as possible. The Comprehensive and Progressive Trans-Pacific Partnership remains as a high-standard multilateral agreement that could serve a role for countries who want to continue economic liberalization. The economies of China and the United States are giants but they’re not world-eaters, and mobilizing the collective scale of “the rest” through multilateralism can help contain the possible damage and improve the predictability of the system.

An approach that features outreach to the Trump administration while simultaneously deepening multilateralism could lead to the paradoxical situation where bilateral relations between individual countries and the United States may strengthen while the wider geopolitical context becomes less conducive to the priorities of Indo-Pacific economies, but there could be worse outcomes. Unfortunately, the coming years will be less about opportunities and more about managing risks. Fortunately, Indo-Pacific economies are in a solid position to prepare.

(Photo: Shutterstock)

Disclaimer: The views expressed in this IOG Economic Intelligence Report do not necessarily reflect
those of the API, the Institute of Geoeconomics (IOG) or any other organizations to which the author belongs.

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Edited by Paul Nadeau, the newsletter will monthly keep up to date on geoeconomic agenda, IOG Intelligencce report, geoeconomics briefings, IOG geoeconomic insights, new publications, events, research activities, media coverage, and more.

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