Analysis: The trade-offs in Trump’s trade policy

This article was originally published by the Council on Foreign Relations on Aug. 1, 2025.

One of the hardest jobs of a policymaker is to weigh trade-offs. Few policies are clean, absolute, and without costs. The art and science of policymaking often comes down to ensuring that the dots between different policy objectives are connected, and the trade-offs are accurately identified and assessed, as part of the decision-making process. Occasionally, policymakers find themselves managing inherent contradictions: the policies they choose to pursue to achieve one of their objectives make another one of their objectives harder or impossible to achieve.

Now that the contours of the Trump administration’s trade policy are coming into greater focus — as initial draft frameworks for agreements emerge from the back and forth of escalatory and de-escalatory rhetoric and positioning — those contradictions are coming into stark relief.

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By the administration’s own telling, the economic case for tariffs is threefold: to raise revenue, to reduce the trade deficit, and to spur reindustrialization. Over the long term, there was always tension among these aims. For example, as Senior Fellow Benn Steil has pointed out, if Trump’s tariffs are successful in reindustrializing the U.S. economy, we will import less and, therefore, collect less tariff revenue. If we are collecting a lot of tariff revenue, it means that imports are still strong, which implies that the trade deficit is likely to remain large and the import substitution contribution to reindustrialization weak.

We are now seeing specific trade-offs in particular sectors and industries as well. Putting oneself in Trump’s shoes and accepting the goals of his “America First” economic agenda, there is a real possibility that his tariff policies are actually making it more difficult to achieve his objectives such as winning the artificial intelligence (AI) race, reindustrializing the U.S. economy, and even addressing the trade deficit.

For example, Trump has made it clear that he wants the United States to be the global leader of AI. Just last week, his administration rolled out a new action plan aimed at removing red tape and building out AI infrastructure at home. At the same time, the administration has imposed a 50% tariff on certain imported copper products that are critical to the energy infrastructure needed to power AI data centers. The administration has also threatened a 25% or higher tariff on advanced semiconductors. Incentivizing greater copper production, smelting, and refining at home might be a worthy policy objective. The same can be said of increasing domestic semiconductor production.

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But these objectives won’t be achieved overnight. One study by S&P Global found that the average copper mine took nearly seventeen years on average to come online. Likewise, cutting-edge semiconductor fabs take years to build, even with generous subsidies from programs like the CHIPS and Science Act. Is it in the U.S. interest, and is it consistent with the Trump administration’s aspirations to remain the leader in AI, to make it more difficult for ourselves to compete with China over the next several years — a critical period in the race to achieve dominance in this sector?

With U.S. copper prices volatile and the power grid struggling to meet new demand from AI data centers, the Trump administration should consider how its tariff agenda could cannibalize its AI agenda. As Senior Fellow Rebecca Patterson noted, “the United States’ AI ambitions would be more effectively supported with tariff exemptions for key allies in the copper supply chain and long-term government incentives for U.S. copper producers and refiners. Not only would this help control AI infrastructure costs and U.S. consumers’ electricity bills, but it also would reduce the risk that global copper supply might be redirected to ‘friendlier’ trade partners, including China.”

The same could be said of the president’s broader reindustrialization agenda. Roughly half of U.S. imports are intermediate goods. Thus, tariffs will raise the cost of production for many products manufactured in the United States, thereby squeezing manufacturing firms’ ability to make the necessary capital investments for reshoring. In percent terms, domestic steel and aluminum prices have also risen by double digits since their pre-Liberation Day lows, which will inherently raise costs for end-users including automotive manufacturers, oil and gas businesses, and aerospace firms — precisely the industrial sectors the administration hopes to strengthen.

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In autos specifically, CFR’s Shannon O’Neil found that, “The new trade deals charge cars coming from the European Union (EU), Japan, and South Korea with a 15% tariff, while Canada and Mexico—who use more U.S.-made auto parts and components — face a steeper tariffs of at least 25% (with discounts for U.S.-made content). This means headwinds for U.S. auto and auto parts makers, as it will favor cars made outside of North America than within it. And it will favor Japanese, Korean, and European brands such as Toyota, Hyundai, and Porsche over U.S. car makers GM and Ford whose supply chains rely more on Canada and Mexico.” Given the stickiness of complex global supply chains, particularly in capital intensive industries like automobiles, the path to reshoring will be long and expensive. Are we willing to accept the trade-off between competing now and hoping to restructure supply chains years from now?

There are also inconsistencies around the rates facing Chinese goods versus transshipped goods. As Senior Fellow Brad Setser observed, a U.S. importer would pay somewhere between 20% and 37.5 percent on goods coming from China. Yet, goods with some embedded Chinese content that come from Vietnam may face an even higher tariff of 40%. As Brad notes, “Setting the tariff on Vietnamese goods with embedded Chinese parts at 40 percent when those same parts can be assembled in China and sent to the United States with a tariff of 20 percent or 30 percent doesn’t make much sense.” It effectively favors imports from the Chinese over imports from other countries.

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A fourth example of such a trade-off is between Trump’s objective to promote investment in the United States, reduce the U.S. trade deficit, and increase U.S. exports, including by devaluing the dollar. In contrast with the last several administrations, Trump has signaled an interest in seeing the dollar weaken (which it has, by around 7% on a nominal basis since the start of the year). But the administration is also seeking “trillions” in foreign direct investment, including from Japan, South Korea, and other key trading partners — which, if fully realized, will place upward pressure on the dollar as foreign firms pour capital into the United States.

Promoting inbound investment poses an inherent contradiction with reducing the trade deficit. Trump has invoked the 1977 International Emergency Economic Powers Act (IEEPA) to levy tariffs on the United States’ trading partners, including Japan and the EU, based on the assertion that the trade deficit constitutes a “national emergency.” But as my colleague Benn has written, “Broadly speaking, the dollars flowing into this country must come from selling us more goods and services — or from buying less from us.” By the president’s own logic, therefore, the inward investment the President has celebrated in his Japan and EU deals could worsen the trade deficit, the rationale for the “national emergency.” In my view, promoting inward investment — to the degree that the recent announcements are real — is a good thing. But it points to the challenges of focusing on reducing bilateral trade deficits as a central plank of the administration’s trade policy.

It is worth noting that, just shy of four months since Liberation Day, tariff revenues have surpassed $100 billion, the S&P 500 is trading at all-time highs, the U.S. economy grew at a 3% annual clip in the second quarter, and inflation has remained relatively muted so far compared to many of the worst-case, or even base-case scenarios mooted by many analysts. The International Monetary Fund also revised its global growth forecast back up to 3%.

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Some of this might be short-lived. Inflation tends to lag tariff actions, but eventually prices are likely tick up as inventories run down. And the impact of tariffs on growth could take two or three quarters to materialize.

The Trump administration is likely inclined to take a victory lap, but over the next year, we could see higher inflation, slower growth, and reduced productivity in general — and the kind of specific trade-offs identified above play out for U.S. leadership in AI and the competitiveness of critical manufacturing industries. Indeed, one of the most critical trade-offs is one of time and certainty: the Trump administration is taking actions that could involve certain costs in the relative near term and uncertain benefits some long time in the future.

But one thing is clear: Trump has effectively shifted expectations as to what constitutes an acceptable outcome for trade negotiations. He has imposed his protectionist will on the global economy to date without meaningful international pushback or tit-for-tat retaliation. (However, retaliation might still come, more subtly and in other domains.) Having accepted Trump’s protectionist direction of travel as inevitable, key trading partners — with the notable exception of China — have opted to acquiesce and offer various tariff reductions and non-binding commitments to purchase U.S. exports and invest in the U.S. in the hopes of securing the best possible tariff rate above Trump’s global minimum duty of 10%.

This global capitulation reflects that there is simply no substitute at the moment for access to the U.S. domestic market. Yet capitulation to Trumponomics does not guarantee success for the United States — nor the president’s own competing policy priorities. Every revolution runs the risk of self-defeat, and Trump’s revolutionary trade policy is no exception. The administration may soon find that navigating the inherent trade-offs of broad-based tariffs — especially the ones around time and certainty — may prove far more difficult than the battle to implement them in the first place.