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How should we view Trump’s second term tariff policy?

Published: 14 Feb. 2025, 00:02

Ha Joonkyung

The author is a professor of economics at Hanyang University.

Is it merely a negotiating tool, or does it signal a larger shift? U.S. Treasury Secretary Scott Besent’s recent media interview suggests that tariffs serve as a strategy of “escalate to de-escalate,” a tool to create tension in order to ease it later — essentially a negotiation tactic to push forward American demands. Considering that effective tariff rates during Trump’s first term rose significantly only against China, it could also be seen as a means of containing Beijing. However, Trump recently emphasized that tariffs are “purely economic, not a bargaining tool,” and given that they are expanding across multiple industries, it seems more reasonable to interpret them as an evolving key economic policy instrument rather than just a negotiation strategy.

If tariffs are widely used to reduce America’s trade deficit and revive its manufacturing sector, and if the United States continues in this direction, free trade will inevitably shrink, accelerating the retreat from globalization. This would mark a fundamentally different shock from what we saw during Trump’s first term.

President Donald Trump arrives to speak at the 2024 Republican National Convention at Fiserv Forum in Milwaukee, Wisconsin, on July 18, 2024. [UPI/YONHAP]

The Republican Party’s antiglobalization doctrine
Why has the traditionally pro-free-trade Republican administration adopted this policy shift? A fascinating excerpt from the Republican Party’s latest platform states, "For decades, our politicians have succumbed to the siren song of unfair trade agreements and globalization, selling out our jobs and livelihoods to foreign nations."

This antiglobalization stance stems from the belief that globalization flooded the U.S. market with foreign goods, undermining domestic manufacturing and eroding middle-class jobs. Globalization took off in earnest during the Clinton administration following the Cold War and accelerated with China’s accession to the World Trade Organization (WTO) in 2001. The resulting decline of America’s manufacturing base and the disappearance of well-paying industrial jobs in traditional manufacturing regions are undeniable facts.

Furthermore, as globalization expanded the playing field, the economic gap between the strong and the weak widened, concentrating wealth among the powerful. One of the easiest ways to keep money flowing in such an environment was to encourage debt, facilitated by financial deregulation. As financialization deepened, soaring debt funneled into asset markets, inflating real estate bubbles. This eventually led to the global financial crisis. During the crisis recovery, major banks and corporations received bailouts, while ordinary citizens lost their jobs and homes. This experience solidified the perception that globalization was the root of all problems.

In 2016, economist David Autor, a professor at MIT, demonstrated in his “China Shock” paper that competition from Chinese imports led to a significant reduction in U.S. jobs, while new job creation lagged behind. The antiglobalization argument is not entirely baseless; at the very least, the benefits of globalization and free trade have not been equitably distributed across society.

In such circumstances, it is impossible to ask Americans to simply endure the negative side effects of globalization for the greater good of free trade. If American workers were told that "globalization yields enough benefits, so let’s expand it further, allow Wall Street and Silicon Valley to amass more wealth and then redistribute it through taxation,” how would they react? Most would likely prefer to reclaim their dignity through stable employment rather than rely on government aid. As long as they believe that foreigners have taken their jobs, reversing the antiglobalization sentiment will be difficult.

The flags of Mexico, the United States and Canada fly in Ciudad Juarez, Mexico Feb. 1, 2025. [REUTERS/YONHAP]

Impact on exports and domestic investment
However, it remains uncertain whether antiglobalization policies will actually solve America’s economic problems. In fact, many of globalization’s side effects could also be attributed to technological innovation. Nobel laureate Joseph Stiglitz has pointed out that even if America strengthens protectionist measures, manufacturing jobs will not return in large numbers — just as agriculture, which once employed 70 percent of the work force, has now dwindled to a tiny fraction.

Yet, politically, it is far easier to blame globalization — specifically, foreign competitors — than to explain the complexities of technological change. Identifying a clear target for public anger simplifies policy responses. Borders, tariffs and barriers become tangible solutions, making them difficult to abandon.

Given workers’ frustrations, a declining birthrate of 1.6 and other social issues, returning to the era of globalization and income disparity would be politically challenging for the United States. Additionally, strategic competition with China adds another dimension to the current situation. Rather than reviving free trade, the United States is likely to leverage its market size to compel foreign companies to set up factories domestically, thereby generating jobs. The Biden administration pursued this strategy with subsidies as an incentive, which successfully spurred an investment boom. The Trump administration, by contrast, is putting tariffs on the table as a coercive alternative.

For export-dependent countries like Korea, this scenario poses a dual threat: declining exports and weakened domestic investment as companies shift resources to America.

Traditional Russian wooden dolls called Matryoshka depicting China's President Xi Jinping, left, and U.S. President Donald Trump are on sale at a souvenir shop in St. Petersburg, Russia, on Nov. 21, 2024. [AP/YONHAP]

Korea’s choice
As protectionism strengthens, product quality and irreplaceability become more important than cost competitiveness. If consumers feel they cannot do without Korean products, tariff burdens will ultimately fall on foreign buyers. Thus, bolstering domestic industrial competitiveness is crucial. Achieving this requires restructuring economic and social policies to fit the new global environment. As the United States moves away from the free-trade-oriented Washington Consensus, Korea must swiftly adapt to the emerging order.

What is the best course of action? Consider Harvard professor Dani Rodrik’s “trilemma” of the global economy: nations can only choose two out of three — hyper-globalization, the nation-state and democratic politics. If a country seeks to maintain its sovereignty while adhering to globalization’s rules, it must sacrifice some degree of democratic responsiveness. Conversely, if a nation prioritizes democratic governance, it cannot fully conform to globalization’s principles. The third option — sustaining globalization while preserving democracy — requires relinquishing national sovereignty in favor of global governance.

Rodrik described the combination of national sovereignty and globalization as a “golden straitjacket,” wherein nations voluntarily constrain their own policy options. In contrast, prioritizing democracy and national sovereignty allows for more autonomous policymaking, akin to the “Bretton Woods compromise.” Korea industrialized under the Bretton Woods system but transitioned to the golden straitjacket model in the 2000s as globalization took hold. Instead of addressing domestic issues through government fiscal measures, Korea has increasingly relied on private-sector lending, especially through expanded household debt. However, with the United States now shifting away from globalization, clinging to the golden straitjacket no longer makes sense. The IMF recently urged major economies to return to fiscal tightening, yet Korea remains one of the few countries to follow this advice. Meanwhile, leading economies are pivoting toward industrial policies and engaging in fierce technology competition.

Korea must reconsider its priorities. In a world retreating from globalization, maintaining national cohesion and creating high-quality jobs will be essential. Strengthening industrial competitiveness through strategic policies is crucial, but these policies must align with the advanced strategies of developed nations. Supporting labor and education policies while actively utilizing fiscal resources will also be necessary.

Translated using generative AI and edited by Korea JoongAng Daily staff.