As President Calvin Coolidge said, in so many words, “The business of America is business.” One hundred years later, his words still ring true, as American businesses have a profound impact on American lives and livelihoods. American businesses employ roughly 83 percent of the US labor force, equivalent to about 136 million jobs—nearly half of which belong to small businesses with fewer than 500 employees. And of course, all Americans depend on commerce to supply the goods and services needed for daily life.

For roughly the past 30 years, geopolitics has taken a back seat relative to macroeconomic, strategic, and technological concerns for businesses. But today, a new hurdle looms: 900 executives tell McKinsey that they see geopolitics as the greatest risk to economic growth.

They’re not wrong. Business leaders understand that a reconfiguration of global trade is underway. Consider that the China tariffs imposed by President Trump were expanded by President Biden, and most of China’s retaliatory tariffs remain in place. And in April 2025, new base and reciprocal tariffs are scheduled to take effect on US trading partners. The uncertainty about the tariffs and possible retaliations or negotiations have created one of the greatest levels of peacetime uncertainty for US businesses. The facts speak for themselves: American business is in a new era of geopolitics, with significant implications.

The United States has long been the lynchpin of the global economy. Its economic preeminence in the years and decades to come will rest on a philosophical and opportunistic alignment between government and business, working in parallel to navigate shifts in global politics, economics, trade, and security.

Ten drivers of geopolitical change

As the United States seeks to update the rules of trade, economics, and security, and other nations react, we inevitably face profound uncertainty. Yet, even in the face of this change, business leaders need to seek understanding and act. As US policymakers reconsider and adjust across ten major drivers of geopolitical change, US businesses can bound the uncertainty by understanding the principles guiding potential US policies. Some shifts are intended to encourage a rewiring of the industrial base for national security or reindustrialization, while others are meant to build leverage in negotiations. Understanding the distinction can ensure long-term realignment of corporate investments and operations with government policies, instead of mere tactical, near-term moves to mitigate risks.

How ten drivers of value are changing amid geopolitical shifts

• Trade Agreements
• Tariffs and Other Trade Barriers 
• Import/Export and Capital Controls 
• Industrial Policies 
• Environmental and Labor/Immigration Policies 
• Foreign-Investment Restrictions 
• Technology, IP, and Cybersecurity Controls 
• Sanctions, Embargoes, and Additions to Restricted Lists 
• Conflicts 
• Multilateral Cooperation and Alliances

American business has adapted before, and has been central to the United States’s successful navigation of prior eras of geopolitical realignment. The post–World War II years saw the emergence of American products, and their cultural influence helped promote values of democracy and capitalism around the world. For example, Coca-Cola rapidly expanded its operations in Europe, Asia, and Latin America, and a bottle of Coke quickly became an icon of American culture. Joseph Stalin banned Coca-Cola in 1946 in the Soviet Union, fearing widespread American cultural influence. Coca-Cola finally entered the Soviet market in 1979, and the company handed out sodas at the fall of the Berlin Wall in 1989. Likewise, the entry of McDonald’s into China in 1990 helped grow Western consumption trends in the country and promoted American values abroad, with the foreign outlets dubbed as “embassies” or “consulates” of American culture.

In more recent years, American businesses have continued to adapt to American policy and economic interests. The rapid exit of American businesses from Russia in the wake of the invasion of Ukraine was done for several business reasons, but it also helped reiterate American values abroad and significantly undermined Russia. The war in Ukraine has also seen American liquefied natural gas (LNG) producers rapidly expand their export capacity, with supplies to European markets tripling since 2021 and US foreign policy aiming to wean European countries off Russian energy. Another example from Ukraine: SpaceX’s Starlink capabilities provided the government, military, and civilians with a communications channel that proved vital to sustained humanitarian and military operations. The move was in line with the US foreign policy of supporting Ukraine’s defense and was renewed through a $23 million contract with the US Department of Defense for continued Starlink support of satellite communication services across the country.

An agenda for US business

So, what should American businesses do today? In our view, leaders should be proactive and shift their mindsets from near-term risk mitigation to long-term value creation. Such an approach requires three actions: accelerating growth, optimizing core operations, and developing new capabilities (see sidebar, “A checklist for executives”).

Accelerating growth

By analyzing a range of growth scenarios across the ten value drivers presented in the exhibit, businesses can find opportunities for commercial acceleration and portfolio rebalancing.

Commercial acceleration. Companies have been able to gain market share or improve margins through moves based on recent geopolitical dynamics, as illustrated by the following examples:

• Nucor redeployed its capital expenditures in response to tariffs imposed in 2018 on nearly all imported steel, tripling profits and allowing it to invest $3.2 billion in building new plants in the United States, including a $1.3 billion steel plate mill in the Midwest, fueling organic growth and boosting domestic production.
• Apple shifted its operations from China to India to avoid US consumer electronics import tariffs and potential supply chain disruptions. Interestingly, by setting up operations in India, Apple was able to grow its market share in India to 23 percent.
• O9 Solutions and SAP are committing to digital twins that can improve transparency across tiers in the supply chain and help clients mitigate geopolitical risks.

Portfolio rebalancing. Geopolitical shocks can cause even stable, growing businesses to falter— and can also make overlooked areas more favorable. Adjusting to geopolitical disruptions through M&A, partnerships, and divestments should be part of companies’ dynamic capital reallocation. Some examples include the following:

• Infosys acquired InSemi Technology Services, a semiconductor design company, to bolster its engineering R&D and develop new chips for artificial intelligence, 5G, and quantum computing. This move aligns with the US government’s goal of onshoring semiconductor manufacturing.
• A US private equity firm is shifting its portfolio away from regions with shrinking profits due to conflict; it is specifically moving the manufacturing of dual-use civilian–military products into regions with fewer restrictions.
• GE Aerospace announced plans to commit roughly $1 billion to enhance its US manufacturing and supply chain, nearly doubling its investment from the previous year. This includes $500 million dedicated to expanding engine production capacity, with a focus on the narrowbody CFM LEAP engine, which powers Boeing 737 MAX and Airbus A320neo jets.

Portfolio rebalancing is often a response to changes in industrial policy and the tax incentives and subsidies at the center of these policies. New US policy on manufacturing is a leading example. China surpassed the United States in gross value added (GVA) in production in 2008, and manufacturing in other countries has also risen. In response, the US government is investing more in its domestic industrial base to decrease reliance on other countries for critical goods (such as high-end manufacturing equipment, defense systems, and semiconductors) and improve supply chain resilience. These investments can help the United States capture more of the value-added portion of the manufacturing value chain.

More specifically, the United States has provided enormous stimulus toward manufacturing through legislation such as the Inflation Reduction Act (IRA), the Bipartisan Infrastructure Law, and the CHIPS Act. In 2023–24, the United States provided approximately $100 billion in subsidies for onshore manufacturing through these policies. Many US companies have capitalized.

The new US industrial policy for digital and green technologies is another example. These same laws have encouraged companies to double their investment in new manufacturing plants from 2022 to 2023, spending an average of $16.2 billion per month. Real investment in the semiconductor and green-energy industries is projected to reach $458 billion by 2028 and create 10,000-plus jobs in 2024–25. One beneficiary is US solar-panel manufacturer First Solar, which sold $700 million in IRA tax credits in 2023 and increased its revenue by 27 percent in 2024.

Defense is another example. Geopolitical dynamics have prompted increased US investment in the defense industrial base, with an increase from an average of $84 billion per year from 2013 to 2019 to $774.5 billion from 2020 to 2023. This includes an additional $74.6 billion in investments through combined supplemental and base defense appropriations for fiscal year 2024. These developments present opportunities for defense contractors and dual-use products, as well as IT, infrastructure, and construction. The purpose of the investments is to both secure US defense manufacturing supply chains and inject fiscal stimulus into the overall American economy.

Defense spending also poses a growth opportunity for unconventional defense companies, particularly in the tech industry. To ramp up AI-enabled systems, the US Department of Defense awarded companies such as Microsoft, Amazon, and Alphabet $28 billion in contracts between 2018 and 2022. Investors are paying attention. From 2021 to 2023, venture capital firms invested nearly $100 billion into defense tech start-ups, a 40 percent increase from the past seven years combined.

Optimizing core operations

Business leaders can boost organizational resilience and improve cost-effectiveness with moves across operations, supplier relationships, global talent capabilities, and technology infrastructure.

Operating footprint. Manufacturing, storage, and customer engagement locations are critical cost categories, and physical commitments provide both geopolitical opportunity and exposure. Several companies have recently shifted their footprint in response to geopolitical shifts:

• Samsung SDI and Chrysler parent Stellantis are in line to receive a US Department of Energy loan of up to $7.54 billion to help build two electric-vehicle lithium-ion battery plants in Indiana. This move would allow Samsung additional access to the US market while enabling US domestic priorities, such as creating about 2,800 jobs and strengthening domestic battery supply chains.
• Apple, which recently announced its plan to invest $500 billion to build new AI servers in Houston in partnership with Taiwanese company Foxconn, is creating 20,000 jobs over the next four years. In this highly uncertain environment, it’s unclear how this will pan out. But in some scenarios, the move could help Apple avoid tariff risk, while reshoring its operations to avoid geopolitical entanglements.
• Semiconductor companies such as Micron Technology and Taiwan Semiconductor Manufacturing Company (TSMC) are expanding their US footprint by setting up fabs in Idaho, New York, and Arizona, with support from the CHIPS Act, as semiconductor manufacturing has emerged as a strategic national priority. Here too, the outcome is uncertain, but that’s true of most strategic bets.

Supply chain. Recent notable supply chain disruptions have led to facility closures, prompting many supply chain leaders to source from multiple vendors, move away from just-in-time ordering and delivery, and even stockpile critical inputs. Some are taking advantage of industrial policies offering incentives for localization of production or supply base (for example, Tesla leveraging the tax credits presented by the US Inflation Reduction Act of 2022 to strengthen its supply chain by sourcing materials domestically and shifting its manufacturing capabilities from Germany to the United States). Others are using advanced technologies (for instance, risk maps and digital twins) to anticipate and prepare for future geopolitical disruption and other challenges. Cisco has started to develop risk maps to anticipate geopolitically driven supply chain issues and requires its suppliers to fill in a business continuity planning (BCP) assessment questionnaire, particularly in more volatility-prone emerging-market countries.

Talent footprint. Companies can review talent concentration patterns, rebalance workforce allocations, and localize teams to mitigate geopolitical impact on their people. In the wake of Russia’s invasion, IBM provided relocation and financial assistance to employees in Ukraine, ensuring both employee safety and talent retention in the face of on-the-ground geopolitical volatility.

This is especially noticeable in digital roles; given the short supply, companies can use expatriate workers (though this may expose companies to changes in immigration policy) and create delivery centers in digital hubs (for example, India, Mexico, Poland, et cetera). Another idea comes from Micron, which established the Northeast University Semiconductor Network, in partnership with leading US universities, to strengthen the pipeline of workers to the semiconductor industry.

Technology infrastructure. Historically, multinational organizations built technology functions where talent, infrastructure, and data footprints extended across borders. That’s changing now, as companies seek to deflect geopolitical threats such as cyberattacks, intellectual property theft, data localization requirements, and more. As of 2023, Microsoft geographically houses all EU customer data within EU data centers to comply with the EU Data Boundary requirements. Companies can select which threats are most critical to their businesses and implement tailored mitigation strategies. Chevron and GE Vernova teamed up to build natural-gas-based power plants located next to US data centers. Some companies are splitting their IT infrastructure and operations across international borders to comply with different regulatory regimes.

Building geopolitical capabilities and strategies

To take effective action, companies need a globally conscious corporate strategy, modern legal structures, and the right teams and processes in place to respond to geopolitical events.

Broadening the view of corporate strategy. When global trends are uncertain, leaders can fold geopolitical considerations into their regular strategy, business-planning exercises, and board discussions. The underlying question for corporations is whether a policy change can influence their strategic decisions, which is underpinned by the risk appetite of the organization.

Future-proofing multinational organizations. The rise in international conflict increases the likelihood that an organization may need to swiftly exit a market, such as Russia in 2020. Business leaders can preemptively evaluate their legal structure to facilitate regional or sector-wide pivots, or even preemptively shift their organization structure (governance, legal, capital, and people) to separate operations across geopolitically aligned theaters in case they need to suddenly sever regional ties.

Building a dedicated functional group. Companies that quickly adapt to geopolitical disruptions often have dedicated teams focused on monitoring global changes, forecasting, and scenario planning. These teams, led by a geopolitics officer, keep senior leaders and the board informed for swift responses. They ensure the company stays ahead of changes and seizes opportunities. At the October 2024 conference of the Institute of International Finance, JPMorgan Chase CEO Jamie Dimon noted that his team runs scenarios and would characterize the current geopolitical risks as “treacherous.” Regular discussions on geopolitical risks and opportunities help in quick decision-making, fostering a culture of resilience and positioning the organization to thrive amid global uncertainties.

Establishing a crisis response playbook. Another trait of a successful organization is codifying the scenario-planning exercises into a playbook, which provides a starting point for assessing the impact of conflicts, tariffs, or other shifts. Such a playbook can equip leadership teams with the critical tools for the first 24, 48, and 72 hours following a core operational disruption.

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Enacted in 1946, the APA governs how federal agencies can issue regulations. The APA establishes specific procedures, such as a public comment period, that federal agencies must follow when they engage in administrative action, such as issuing new rules and regulations, adjudication of licenses, or interpretation of existing regulations. In addition, the APA provides standards for judicial review of an agency action, enabling courts to strike down actions if they find that their substance or procedural history fails to meet APA standards. 

However, the APA excludes certain agency functions from its procedural requirements and judicial standards, including actions involving “military or foreign affairs functions” under Title 5, Sections 553(a)(1) and 554 (a)(4) of the U.S. Code. In short, the Rubio memorandum is an effort to protect most of President Trump’s actions on trade, illegal immigration, export controls, artificial intelligence, and espionage from procedural requirements and judicial review by pulling these under the umbrella of the “foreign affairs” exception. 

Doing so would insulate the administration from having trade-related agency actions struck down in the courts because of “process fouls”—procedural errors in conducting an agency action. For example, agency actions involving trade would no longer be exposed to potential “arbitrary and capricious” claims under Title 5, Section 706, of the U.S. Code, which allow courts to strike down agency actions that are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. In other words, agency actions can be struck down when they are so far-fetched that they appear to lack any reasonable basis, do not consider relevant factors, or demonstrate a clear error of judgment. Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971). These agency actions would still remain subject to tests of constitutionality or compliance with applicable laws.

The first Trump administration frequently ran into process fouls, and so far, the new administration gives every sign of having the same problem. In its first two months, the administration has already run into a burst of unfavorable court rulings.

Given the administration’s focus on implementing new trade actions with respect to China, Mexico, Canada, and others, it is unsurprising that it would take steps to shield these actions from judicial challenges. Still, the Rubio memorandum raises the question of whether existing trade laws are, in fact, subject to the APA, and, if so, whether the secretary’s memo will make any difference. The short answer is that some trade laws are subject to the APA, and some are not. It is not clear whether the memo would force any significant changes.

Q1: Which trade actions are subject to the APA, and which are not?

A1: The distinguishing question for whether a trade action is subject to the APA is whether the statute authorizing the action requires a presidential decision, in which case action taken under such statute is not subject to the APA, or an agency decision, in which case action taken under such statute is subject to the APA. The Supreme Court held in Franklin v. Massachusetts, 505 U.S. 788 (1992) that presidential actions are not reviewable under the APA, as the president is not specifically included in the APA’s defined scope of what constitutes an “agency action.”

Because the International Emergency Economic Powers Act (IEEPA), which the administration called on to impose recent across-the-board tariffs on China, Mexico, and Canada, requires a presidential decision, action taken under the statute is generally not subject to the APA. IEEPA actions nevertheless can be challenged in the courts as violations of due process under the Constitution or as actions beyond the president’s authority, as in Dames & Moore v. Regan, 453 U.S. 654 (1981).

Section 232 of the Trade Expansion Act of 1962, which the president has relied on to impose tariffs in both administrations, also involves a final decision by the president after a report and investigation by the Department of Commerce and is thus also exempt from the APA. While Section 232(b)(2)(iii) of this statute authorizes the Department of Commerce to hold hearings and seek public comments, it does not require these procedural steps. Instead, doing so is discretionary: The Department of Commerce can, “if it is appropriate and after reasonable notice, hold public hearings or otherwise afford interested parties an opportunity to present information and advice relevant to such investigation.” Because these procedural steps are not mandatory, and in the end, the final decision on any action rests with the president, Section 232 actions can only be challenged on Constitutional and other statutory grounds and not under the APA.

The other statute that the first Trump administration used frequently was Section 301 of the Trade Act of 1974, which it used as the basis for a series of tariff actions on China. Unlike actions taken under IEEPA and Section 232, actions taken under Section 301 are subject to the APA because the statute grants ultimate authority to the U.S. Trade Representative (USTR), albeit subject to the direction of the president. Accordingly, USTR Lighthizer’s decisions in 2018 and 2019 to impose 25 percent and 7.5 percent tariffs on various Chinese products were challenged under the Administrative Procedure Act in the U.S. Court of International Trade (CIT). The court found that USTR’s Section 301 decisions are covered by the APA, rejecting the U.S. government’s claims that Section 301 decisions are non-reviewable because they are presidential actions. The court also found that Section 301 decisions are not covered by the foreign affairs exception to the APA. The court went on to find that USTR had failed to adequately respond to comments filed as part of the notice and comment process for the tariff actions as required by the APA, although the court eventually upheld the tariffs after USTR filed a supplemental response to the comments. The case is still on appeal at the U.S. Court of Appeals for the Federal Circuit (CAFC).

Another consideration related to which trade actions might be subject to the APA is their constitutional basis. Many of the trade laws discussed above, including Section 301, are traditionally considered to be an exercise of Congress’s constitutional authority to “regulate commerce with foreign nations” under Article I, Section 8, which has been delegated with certain guidelines to the executive branch to implement. Actions authorized by these statutes are considered distinct from trade actions that might stem from the president’s Article II authority over foreign affairs, which is the focus of the Rubio memorandum. In addition, antidumping and countervailing duty decisions under Title VII of the Trade Act of 1974 are expressly subject to judicial review in Title 28, Section 1516a(b), of the U.S. Code, under an arbitrary and capricious standard. Likewise, decisions under Section 201 of the Trade Act of 1974 are reviewable by the Court of International Trade under Title 28, Section 1581(i), of the U.S. Code, and the U.S. International Trade Commission is required to hold a public hearing and afford opportunities for stakeholder comments in such proceedings under Title 19, Section 2252(b)(3), of the U.S. Code. In the end, it is unlikely that the administration will be able to get traditional trade statutes like Section 301, Section 201, or Title VII antidumping and countervailing duties excepted from APA procedural provisions or judicial review, but they might have better luck with IEEPA and Section 232.

Q2: Have the president’s previous tariffs been challenged in court?

A2: The use of any of these tariff authorities by President Trump is almost certain to be challenged by importers or other stakeholders, but as we pointed out in a previous article, such claims would face a steep uphill climb if past precedent is any indication. The courts, including the Supreme Court, traditionally have been reluctant to interfere with the president’s exercise of foreign affairs and tariff powers. To be sure, most claims have advanced constitutional or statutory, rather than APA-based, arguments. 

The CAFC stated in Maple Leaf Fish Co. v. United States, 762 F.2d 86 (Fed. Cir. 1985) that courts have “a very limited role” in reviewing presidential trade actions “of a highly discretionary kind,” such as tariffs or import quotas under Section 201, and such actions can only be set aside if they involve “a clear misconstruction of the governing statute, a significant procedural violation, or action outside delegated authority.” Maple Leaf Fish Co. is particularly relevant since the CAFC has jurisdiction over most trade law appeals.

While importers have previously challenged President Trump’s Section 232 tariffs on imported steel and aluminum and his Section 301 tariffs on Chinese products, these cases have gone nowhere. In American Institute for International Steel (AIIS) v. Morgan, Case: 19-1727 (July 28, 2020), the CAFC reaffirmed that the Section 232 tariffs did not violate the Constitution’s Separation of Powers under the non-delegation doctrine. In Transpacific Steel v. U.S, and in PrimeSource Building Products v. U.S., Case No. 2021-2066 (Fed. Cir. 2023), the CAFC found that delays imposing Section 232 tariffs beyond the 180 days spelled out in the statute were still within the president’s authority. Likewise, the CIT rejected a challenge to President Trump’s Section 301 tariffs, although the case is still pending on appeal.

 Q3: Will there be new challenges, and how are they likely to play out?

A3: Given the current Supreme Court’s willingness to revisit past precedents and the anticipated high costs of the tariffs, there will almost certainly be legal challenges to the administration’s trade actions. This prediction holds true even if the Rubio memorandum successfully exempts certain trade actions from the judicial review under the APA’s “arbitrary and capricious” standard, because some of the most promising claims against the Trump administration’s recent tariffs are based on constitutional arguments.

President Trump’s tariffs on steel, aluminum, and Chinese products under Sections 232 and 301 would likely be on solid ground given past court decisions upholding similar actions in Trump 1.0, although his Section 232 tariffs on imported autos could be challenged on statutory grounds given the five-year lapse between issuance of the Department of Commerce’s report on February 19, 2019, and his decision to act by imposing 25 percent tariffs on imported autos and core parts. Likewise, President Trump’s “Liberation Day” reciprocal tariffs on a broad swath of U.S. trading partners could be more exposed, given their unprecedented scope. Importers are likely to argue (1) that the reciprocity tariffs violate the Supreme Court’s recent revival of the “major questions doctrine” under Chief Justice Robert’s opinion in West Virginia v. Environmental Protection Agency, 597 U.S. 697 (2022), which held that administrative agencies do not have the power to regulate on a “major questions” of extraordinary economic and political significance unless they have clear statutory authority from Congress; and (2) that the statutes violate the nondelegation doctrine because they completely cede Congress’s power to levy tariffs to the president without providing an intelligible principle or constraining guidelines on how to implement such tariffs. While the non-delegation doctrine has been a dead letter since the 1930s, some of the conservative justices (e.g., Justice Gorsuch) have expressed an interest in revisiting it (and a nondelegation challenge to the FCC’s University Service Fund is currently before the Supreme Court in Federal Communications Commission v. Consumers’ Research). Any challenges to the Trump tariffs will initially be heard at lower levels but will likely get to the Supreme Court eventually. As discussed above, both the Supreme Court and lower courts have repeatedly upheld tariff statutes against nondelegation attacks. As a practical matter, many federal judges will likely be unwilling to check the president’s authority because they perceive his tariff policies as having just received a popular mandate and because they are reluctant to second-guess a presidential determination of an emergency or national security threat. As explained in our previous paper, one key issue to watch is whether lower-level judges are willing to preliminarily or temporarily block a presidential action that rests on a declaration of emergency or national security finding while the litigation plays out.

Warren Maruyama is former USTR general counsel under President George W. Bush and former White House policy staffer under President George H.W. Bush. Meghan Anand is a practitioner of international trade and investment law. William Reinsch is senior adviser and Scholl Chair Emeritus at the Center for Strategic and International Studies in Washington, D.C.

To read the full analysis, click here.

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Conservatives in the United States have been positioning tariffs as a potent tool to boost American industry. It sounds patriotic, doesn’t it? But sometimes patriotism comes with a price. Tariffs can cause a heavy burden on U.S. consumers, increasing their household spending and causing financial anxiety.

The new U.S. President Donald Trump delayed day-one tariffs but stayed true to his campaign promise, signaling tariffs on all Chinese imports. He vowed 25% duties against Canada and Mexico starting on Feb. 1.

Tariffs generally lead to higher prices, but China could absorb some of the cost – although this has historically not been the case. Some argue that past tariffs didn’t fuel overall inflation, and that’s partially true. The Consumer Price Index rose 2.4% in 2018 but slowed to 1.8% in 2019. Price increases impact certain sectors, particularly those subject to tariffs.

But don’t mistake that for Chinese exporters footing the bill. Importers took on the burden, sacrificing their profits, but Americans still paid the price. According to the National Bureau of Statistics, 95% of U.S. tariffs were reflected in the prices of imported products as soon as they entered the American border. This means American importers paid $95 for every $100 in tariffs. Even two years later, prices remained sticky.

Research by two economists, Pablo D. Fajgelbaum and Amit K. Khandelwal, highlights why this happened during earlier trade wars: Sudden tariffs left U.S. importers stuck with pre-signed contracts, unable to adjust demand or shift the cost to consumers.

Price elasticity puzzle

In a future trade war, even with a warning, tariffs on all Chinese imports could drive overall inflation, with Trump promising to target all products, not just specific sectors. This is where price elasticity comes into play. Chinese companies can push tariff costs down to U.S. buyers in industries with rigid demand, where consumers can’t easily switch or reduce purchases of essentials, as evidence from previous trade wars suggests.

Rigid consumer behavior centered around certain products – such as ship-to-shore cranes, which the U.S. imports from China and needs for its construction purposes – almost always challenges the protectionist policy outlook since consumers end up bearing the brunt of rising tariffs. With no domestic firms producing these cranes, a 25% tariff now hits ports with at least $131 million in extra costs.

Looking ahead, the key question is how much of the tariff burden China will absorb – and for how long. Beijing is playing the long game. With the Belt and Road Initiative and stronger ties to BRICS countries, China is diversifying its trade and reducing dependence on the U.S. This makes Beijing less likely to lower prices to keep its foothold in American markets.

Alternative markets dilemma

As Trump’s trade war gains momentum, U.S. businesses will scramble to find alternatives to Chinese imports. However, this quest for new suppliers is not without its challenges. If the U.S. follows through on its threats to impose tariffs on imports from the European Union, Canada or Mexico, the cost of imports from these countries could also rise. This situation is further complicated by the fact that Russia is also under sanctions, leaving businesses with fewer affordable options.

During the previous trade war, tariffs were also applied to steel and aluminum from Canada and Mexico. As a result, domestic price indexes for competing iron, steel and steel mill products rose by 10.2% to 17.7% between February and September 2018.

What happens when there’s no escape route? Consumers stock with fewer affordable options and pay more, whether the goods come from China or somewhere else.

Supply gap dilemma

When tariffs are in play, inflation can rear its head if local production can’t fill the gap left by imported goods. Boosting domestic production is not a straightforward solution. In the previous trade war, Trump attempted to lower interest rates to dissuade industry leaders from expanding their offshore investments in production facilities and attracting capital back into the country. This strategy could help boost domestic production and partially fill the supply gap, but it’s not a silver bullet.

Since real wages in the U.S. are significantly higher compared to China, American production will always be less cost-effective.

Many American companies still produce in China, drawn by both – its cheap labor and the “In China, for China” strategy, which keeps them close to the Chinese market sphere as well as neighboring nations such as Vietnam, Malaysia and India. Even after the imposition of trade tariffs, U.S. foreign direct investment in China continued to rise. It reached $107 billion in 2018, increased to $109 billion in 2019 and grew to $116 billion in 2020. Therefore, bringing capital back can be a great rhetorical phrase, but it is out of step with economic realities.

Trump’s China policy can produce a blowback effect, making Chinese citizens more pro-domestic and protectionist in their market outlook. According to data from the China Academy of Information and Communications Technology, foreign mobile phone shipments to China dropped by 47.4% in November 2024 compared to the previous year.

As a result, Chinese consumers are likely shifting toward domestically made products, forcing U.S. companies to increase investments in China to remain competitive.

The result? A supply gap at home, inflation climbing higher and consumers left with footing the bill.

Competition and price monopoly

The lack of alternatives can lead to higher prices – even for domestically produced goods, as producers face less pressure to keep prices competitive.

When Trump imposed a 20% tariff on washing machines, the effects rippled through the market in unexpected ways. As anticipated, the price of foreign-made washing machines climbed due to the new tariffs. According to the National Bureau of Statistics, the price of washers rose by nearly 12%. However, the surprise came when prices for domestically produced washing machines also started to rise. It didn’t stop there – prices for dryers also began to increase by a similar amount.

In industries where entry of new players is tough and the size of base capital is directly linked to the longevity of a business, tariffs can take the steam off the competition. Many believe monopolies are a thing of the past in the U.S., but think again. Take March, for instance, Apple faced accusations of monopolizing the market. This is important because electrical devices are a massive slice of U.S. imports from China. In 2023 alone, items like smartphones, computers, lithium-ion batteries, toys and video game consoles comprised 27% of all goods imported from China. If tariffs hike prices and competition shrinks, consumers could see costs skyrocket in this sector.

With fewer players in the game, producers can charge higher prices and basically have a price monopoly. And here’s the kicker: If the supply line can’t be quickly ramped up, prices will rise even more. Take the example of solar panel tariffs. When a $1 tariff is placed on manufacturers, the price of installed photovoltaic panels subject to the tariff increases by $1.35. So, while tariffs are projected to protect domestic industries, they may only create higher prices for the consumer in the long run.

Import dependency problem

Besides all those critical areas, there is yet another blind spot: Raw materials prices. Some industries rely heavily on imported raw materials and tariffs on these imports can increase production costs. We saw this play out in 2018 when tariffs on Chinese goods increased input costs for many American industries.

Ford and General Motors even slashed profit forecasts in 2018, blaming higher steel and aluminum prices caused by 25% tariffs. The ripple effect hit products like nails, bumpers, tractor parts, wires and cables, forcing additional tariffs on “derivative” steel and aluminum goods by 2020.

Things may get worse as China has started to retaliate. Recently, they’ve restricted exports of key minerals like germanium and gallium, which are vital for making semiconductors, solar panels, EV batteries and infrared tech. With China controlling 94% of global gallium and 83% of germanium, finding replacements is no small feat.

2025 will be a critical year for the U.S. economic outlook. It would not just determine where American citizens will have to narrow their margins but also shape an economic order where the U.S. may be sidelined by several emerging powers to continue trading with China despite the risk of sanctions looming large.

To read the op-ed as it was published on the Daily Sabah website, click here.

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By July 1, 2026, the parties to the United States–Mexico–Canada Agreement (USMCA) must confirm in writing whether they wish to extend its term. Otherwise, a clock will start to tick toward the termination of USMCA at the end of its original sixteen-year term in 2036.

To read this article as it was published on the Carnegie Endowment website, click here.

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• John Maynard Keynes saw many economic problems with trade liberalization and persistent trade imbalances, especially regarding employment and national economic growth.
• Other famous economists of the 20th century such as Paul Samuelson and Joan Robinson also recognized how unfettered trade liberalization can harm workers in developed countries and how tariffs can boost employment.
• Modern day Keynesians such as Paul Krugman and Joseph Stiglitz often criticize tariffs, but concede that trade imbalances can harm employment and GDP.
• Keynes’ support for the use of broad tariffs to boost employment, government revenue, and national prosperity should be recognized and supported by Keynesians today.

Although most modern-day Keynesian economists advocate for unfettered free trade, John Maynard Keynes himself held a skeptical view of trade liberalization. Keynes believed that free trade could exacerbate domestic unemployment and economic imbalances and argued for the use of tariffs and trade protections to safeguard national industries, preserve employment, and promote the balance of trade. He also believed that free trade was not particularly successful at preventing war, and that some isolationism would serve the cause of peace better. Keynes’ position reflects a much more pragmatic approach compared to the more unwavering support for economic internationalism seen among many of his intellectual successors.

Keynes’ Problem with Free Trade

One of Keynes’ major issues with free trade was the employment assumptions of many advocating for the free trade position. As Keynes states it, “free trade assumes that if you throw men out of work in one direction you re-employ them in another. As soon as that link in the chain is broken the whole of the free trade argument breaks down.”

Another way to put this is that the gains from free trade (in the form of higher income for export sectors) can be dwarfed by losses in employment and income for domestic sectors affected by imbalances.

This effect was further explained in the Stolper–Samuelson theorem of international trade by the American economists Wolfgang Stolper and Nobel Prize Winning Economist Paul Samuelson. This theorem stated that free international trade would provide gains for the relatively abundant sector in an economy (skilled labor or capital) and harm the relatively scarce sector in an economy (unskilled labor). For a country like the United States in the 21st century, this materializes through free trade benefiting capital intensive sectors (such as finance and tech) and harming workers in labor intensive sectors (such as manufacturing). Meanwhile, workers in countries with an abundance of cheap labor (such as China, Southeast Asia, Mexico, etc.) benefit.

Even new Keynesians such as Paul Krugman have begun to admit this point. While clinging to the belief that “Cheap imports may make a nation as a whole richer”, Krugman also now admits that “they [cheap imports] can also hurt significant numbers of workers.” Krugman also adds that “It has also been clear for a long time that trade deficits can be damaging if the economy is persistently depressed, with insufficient demand to produce full employment.”

Keynes’ biggest problem with free trade was the assumption that workers who lose their jobs in manufacturing industries will find better, higher paying jobs in new industries. That widely held economic belief did not allow for the reality that those displaced workers were often not re-employed at all.

Keynes Knew Tariffs Can Boost Domestic Production and Employment

As Great Britain (and the rest of the world) faced major employment and economic issues during the Great Depression, one solution proposed by John Maynard Keynes to boost employment was tariffs.

In a 1931 essay, Keynes argued for “import duties of 15 per cent on all manufactured and semi-manufactured goods without exception, and of 5 percent on all foodstuffs and certain raw materials, whilst other raw materials would be exempt.”

The explicit goal of these tariffs (as is the goal of tariffs today) is to not only increase revenue, but also increase the use of domestically manufactured goods, boosting the country’s production and employment. As Keynes puts it, “In so far as it [tariff policy] leads to the substitution of home-produced goods for goods previously imported, it will increase employment in this country.”

Keynes also understood how the modern world economy was much different than the simpler world economy of classical free trade economics. Absolute and comparative advantage were novel ideas in David Ricardo’s world of making cloth and wine in England vs. Portugal, but it is a misleading oversimplification in today’s economy. In today’s world dominated by continuously advancing technology and large-scale manufacturing facilities, Keynes found that, “Experience accumulates to prove that most modern mass-production processes can be performed in most countries and climates with almost equal efficiency.” 

Moreover, Keynes also saw no major impact of such a tariff policy on prices or inflation. Regarding his tariff proposal, Keynes states, “I am prepared to maintain that the effect of such duties on the cost of living would be insignificant—no greater than the existing fluctuation between one month and another.”

Other respected Keynesian economists of the 20th century agreed with Keynes’ findings on trade. British economist Joan Robinson argued in 1937 that “For any one country an increase in the balance of trade is equivalent to an increase in investment and normally leads (given the level of home investment) to an increase in employment.” And according to Robinson, “The principal devices by which the balance of trade can be increased are (1) exchange depreciation, (2) reductions in wages (which may take the form of increasing hours of work at the same weekly wage), (3) subsidies to exports and (4) restriction of imports by means of tariffs and quotas. To borrow a trope from Mr. D. H. Robertson, there are four suits in the pack, and a trick can be taken by playing a higher card out of any suit.”

The takeaway for the U.S. economy in the 21st century is clear. Given that annual imports are $1 trillion more than exports, and unless we are willing to lower U.S. wages, our best two cards to play to boost investment, production, employment, and income are tariffs/quotas and exchange rate management.

Balance of Trade

The core of Keynes’ problem with free trade is the devastating consequences of trade imbalances that it can bring about (as is the current case in the United States with a $1 trillion annual trade deficit).In a 1933 article entitled ‘National Self-Sufficiency’, Keynes outlines how “economic internationalism embracing the free movement of capital and of loanable funds as well as of traded goods may condemn this country for a generation to come to a much lower degree of material prosperity than could be attained under a different system.”

Most Keynesians today unfortunately reject any criticism of free trade and further claim that trade imbalances are not a concern. Their views are more akin to the Classical Economists of Keynes day who believed in the utopian perfection of global market forces and were threatened by his ideas.

A few New Keynesians, however, such as Joseph Stiglitz still subscribe to Keynes’ ideas on the balance of trade in essence. Regarding many euro countries, Stiglitz argues that “the fact that these countries are importing more than they are exporting contributes to their weak economies” adding that with a better balance of trade, “GDP would increase, and unemployment would decrease.” However Stiglitz, Krugman, and many other modern Keynesians fail to go further and propose the broad tariffs and exchange rate management solutions as Keynes did.

Keynes knew that the balance of trade is a substantial issue for both the world economy and especially for deficit countries. And that the root of the “beggar thy neighbor” problem primarily lies with trade surplus countries. Despite contemporary criticism for unfettered free traders, Keynes advocated strongly for a mechanism in the Bretton Woods negotiations to prevent imbalances from occurring. However, his proposals in that regard failed to be included in the final agreement.

Stiglitz put it this way, “Keynes believed it was surplus countries, far more than those in deficit, that posed a threat to global prosperity; he went so far as to advocate a tax on surplus countries.” Unfortunately Stiglitz has criticized the Keynesian use of tariffs to fix the problem.

Conclusion

Despite the current (albeit slipping) support among many mainstream Keynesian economists for unfettered free trade, John Maynard Keynes himself did not support this view. Keynes realized the dangers of how free trade can create substantial trade imbalances, harm domestic employment, and reduce national growth. Keynes also recognized how broad tariffs could correct this problem through increasing domestic production and employment, while having little to no impact on inflation and prices.

Even though it is not possible (or advisable) to reverse all aspects of globalization, the economic globalization of trade is certainly reversable and would hold substantial benefits for American workers and manufacturing. As John Maynard Keynes said, “I sympathise, therefore, with those who would minimise, rather than with those who would maximise, economic entanglement between nations. Ideas, knowledge, science, hospitality, travel these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.”

To read the article as it was published on the Coalition For A Prosperous America webpage, click here.

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Even if the United States manages to avoid the calamity — for its democratic institutions, social cohesion and international standing — of a second Trump term after 5 November 2024, this remains the stark reality. 

US Vice President Kamala Harris and the Democrats reject the worst excesses of Trumpian mercantilism, which now includes a promise to levy blanket tariffs of 10 to 20 per cent on all imports — with a 60 per cent rate on imports from China — though they too promise episodic tariffs on China.

Harris and her party may be not as radicalised against the basic principles of economics as Trumpian Republicans. But with their focus on ‘middle class economic diplomacy’, they have no intellectual counter-narrative about the way in which America’s slide into isolationism and protectionism will undermine its economic strength and political power. And their instinct is to succumb to the political incentives to play on Trump’s policy turf. 

The ‘America First’ trade policy has won a strategic victory over the past eight years, shifting the US bipartisan consensus towards the idea that globalisation was a lousy deal for Americans.

Under the Biden administration, Trump’s tariffs on China and Washington’s undermining of the World Trade Organization (WTO) dragged on. US abuse of the General Agreement on Tariffs and Trade’s security exception to force decoupling from China in purportedly ‘strategic’ industries also became more deeply entrenched, and its case for WTO reform remained unprosecuted.

There is no reason to expect this consensus won’t stick for years to come, even if Trump loses the election. If Harris becomes president, she will be playing political defence from day one. She will face a polarised electorate, a divisively partisan Supreme Court and possibly a recalcitrant Republican-controlled Congress — all while looking towards a re-election campaign that will depend on shoring up support in states hit hard by deindustrialisation. 

With the Trump–Biden policy status-quo momentarily coinciding with full employment, moderating inflation and strong wage growth, a Democratic administration will have next to no incentive to give Trump an opportunity to accuse it of selling out US interests to foreigners by lowering barriers to trade and investment, regardless of whether they are negotiated via bilateral sweetheart deals or (less likely) through multilateral agreements.

What does this mean for Asia’s economies and the hard choices that Asian economic policy strategists must make? 

For one thing, they can’t count on the WTO being of very much use in governing the terms of their trade and investment relationships with the United States. Trump’s approach to trade was notoriously transactional, with deals struck on a sweetheart basis where countries that are most politically useful have the inside track. The Biden-era approach to ‘friendshoring’ is merely a more genteel variety of the same, where access to US markets and concessions are contingent upon political fealty and usually bring economic self-harm. The Nippon Steel debacle defines the limits to economic quid-pro-quos.

And while the Democrats are now — if only by default — the party of internationalism and multilateralism, Biden-era foreign policy has also seen US consolidation of strategic competition with China as a central pillar of US foreign policy. This strategy, with China being Asia’s principal economic partner by far, cuts to the core of Asian economic interests. Under Harris it is likely that engagement with multilateral institutions, and Washington’s international economic diplomacy, will continue to be hostage to that mission.

It follows from this — the very dry gully of US leadership on trade and global economic governance, and diverging visions for China’s place in the regional order and global economy — that three broad principles must shape Asia’s response to these American realities:

Solidarity — especially if Trump is re-elected — and resisting the urge to play Trump’s transactional approach in foreign relations to carve out special deals at the expense of regional partners will be the key. Countries with strong security ties to the United States — Japan, Australia and South Korea — will need to keep the interests of Southeast Asian and non-aligned partners in mind or risk a total breakdown in trust and cooperation that compromises regional stability.

Openness is the guiding principle — recognition that open regionalism means that frameworks need to be kept in place to ring-fence multilateral engagement including with China, and at some point down the track, hopefully the United States.

Activism is a sine qua non — this means proactive diplomacy to defend the core WTO framework, including by strengthening the Multi-Party Interim Appeal Arbitration Arrangement, such that if and when political consensus in the United States shifts there is a framework to engage with it. Whether Harris or Trump emerges the winner in next month’s election, Asia’s international economic diplomatic challenge remains the same — to double down on strategies that accord top priority to keeping the global multilateral trade enterprise alive, while the United States is missing from it. Failure to do so would risk Asia’s prosperity and do untold damage to regional political stability.

Peter Drysdale is Head and Liam Gammon is a Research Fellow of the East Asian Bureau of Economic Research at The Australian National University.

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In early 2025, a new US administration and European Commission will be in place. It will then be more critical than ever that the United States and the European Union (EU) coordinate their approaches to international trade across a wide range of issues. A significant impediment to this coordination is the persistent temptation—by a range of players in transatlantic circles—to articulate and emphasize supposedly fundamental differences between Washington and Brussels in a way that highlights the virtues of one and denigrates the other. As satisfying as that classic conflict narrative is, it has real-world negative consequences for both parties and should be reassessed by all players in favor of the reality that what unites the United States and the EU dwarfs their differences.

State of play and the strategic imperative

Leading into 2025, cascading joint challenges of supply chain vulnerabilities, climate change, deindustrialization, competitiveness, geopolitical crises, and damaging third-country non-market economy policies and practices—coupled with an international rules system designed for another era—will increasingly drive both sides to use unilateral measures to protect and achieve legitimate policy goals. The US tariffs on steel and aluminum and the Inflation Reduction Act are two such examples; the EU Carbon Border Adjustment Mechanism (CBAM) and Deforestation Regulation are two others. Other measures risking transatlantic friction include the EU’s Corporate Sustainability Reporting Directive, the longstanding Boeing-Airbus subsidies dispute, previous tensions over the EU digital services tax, a failure to reach a critical minerals agreement, and US companies’ compliance with the EU’s Digital Markets Act.

The current trend is not abating. Unless the United States and the EU cooperate on those unilateral measures, there is a high risk that they will result in significant bilateral trade clashes. At a minimum, this will undermine achieving generally shared goals; at worst, it could result in spiraling bilateral trade retaliation.

A significant barrier to transatlantic trade cooperation is the persistent underlying narrative—among policymakers, think tankers, and others—that the United States and the EU approach the world from fundamentally different perspectives. In the memorable words of a distinguished commentator twenty years ago, the United States is from Mars, and the EU is from Venus. This can be an attractive narrative, as it allows each to claim virtues that the other supposedly lacks. It allows Washington to take pride that it is tougher and more clear-eyed than a feckless EU; it allows Brussels to claim that it is more law-abiding and multilateral than the “Wild West” United States.

But this narrative is a choice, not a fact. And the strong inclination to triumphantly celebrate supposed fundamental differences has negative real-world impacts. This narrative finds its way into public statements, is sometimes amplified by a press happy to report on big-picture fights, and can end up deeply embedded in the public consciousness, determining whether or not there is public support for US-EU cooperation. And this narrative of fundamental differences between the United States and the EU—each side claiming the higher virtue—undermines US-EU cooperation.

Further, US-EU cooperation is a necessary but insufficient condition for making progress on these global challenges. In a context in which cooperation with other trading partners is essential, setting up a sharp divide between the United States and the EU encourages those trading partners to take sides and discourages their cooperation with the EU and the United States.

Recent among many examples are the discussions over the Global Arrangement on Steel and Aluminum. To recall, the United States imposed tariffs on steel and aluminum from around the world because of damaging subsidized and non-market excess capacity in China, and the EU retaliated with its own tariffs on US products. Both sides brought dispute settlement disputes to the World Trade Organization (WTO). The United States and the EU de-escalated the situation by agreeing to a temporary two-year settlement in October 2021, under which historical levels of EU steel and aluminum could enter the United States duty free, and the EU suspended its retaliatory tariffs. By the end of October 2023, the EU and the United States were to have reached a permanent arrangement to free up bilateral trade in steel and aluminum and eliminate retaliatory tariffs. It didn’t happen, amid somewhat angry recriminations, but at the last nail-biting minute, Washington and Brussels agreed to extend the truce for another fifteen months to give breathing room to negotiate a deal.

The inability to reach a final arrangement on such a tight timeframe was not surprising. Its goal is as ambitious and unprecedented as it is critical: Climate change is an existential crisis, and non-market-based products threaten key industries and their ability to produce sustainable products. Washington and Brussels urgently need to address these issues, and this novel arrangement is a way to tackle both simultaneously: It would incentivize bilateral trade in environmentally sustainable and market-based products and disincentivize trade that is not. US National Security Advisor Jake Sullivan declared the arrangement “could be the first major trade deal to tackle both emissions intensity and over-capacity.” Negotiating such an agreement is not only novel, but it is challenging in an international rules system that prohibits discrimination against “like” products and that was negotiated when non-market state actors were not much of a factor.

That this was a groundbreaking negotiation addressing critical new joint challenges could and should have been the explanation for the inability to reach a permanent arrangement. That narrative would have supported the parties’ continued work to reach a final arrangement.

Instead, the public explanation from Brussels for the failure was that the United States was insisting on WTO-illegal tariffs and an illegal free pass on the EU’s CBAM as part of the arrangement. The EU’s trade chief, Valdis Dombrovskis, largely stuck to the line ahead of negotiations, stating, “As the EU, we’re committed to multilateralism, to the rules-based global order. We would like to avoid engaging in agreements which manifestly violate World Trade Organization rules.” Later, he hit Washington for failing to provide a clear path to end the tariffs, which Brussels deemed illegal. The United States was less vocal publicly on the failure to reach an agreement, but trade watchers understand the United States’ implied position is that the EU is institutionally hidebound, unwilling to reach beyond currently existing regulations that have failed for decades to fix the problem.

Each of these positions fit into the Mars-Venus narrative—and left each side convinced that it was right. But when talks break down with one party characterized as a rule breaker and the other as being rigid and unimaginative, it does not create an environment for further joint progress. How does the EU then justify negotiating with a rule breaker or ultimately finding a compromise along the lines of something it condemned? How does the United States justify continued discussions with a rigid institution that is unwilling or unable to be creative enough to meet new challenges?

To be clear, the United States and the EU will have good-faith disagreements over their approaches to issues, even those on which they agree. There is nothing wrong with confronting and trying to resolve those disagreements. But the readiness to attribute those disagreements to values-based fundamental differences digs a virtually unbridgeable gulf.

Looking ahead

This dynamic has shaped (and thwarted) cooperative US-EU efforts in numerous areas, including reforming WTO dispute settlement, addressing distortions caused by non-market actions of state enterprises, subsidies, excess capacity, coercion, and a host of other issues. Unless there is a change, it will continue to do so. And the number and significance of areas in which US-EU cooperation will be critical will only increase as joint global challenges mount.

Policy recommendations

There are ways to lay a better foundation for US-EU cooperation going forward:

• Focus messaging on common values and interests. All proponents of stronger transatlantic ties—think tanks, academics, business and nongovernmental organization (NGO) stakeholders, and government officials alike—should emphasize publicly and privately the reality that what unites the United States and the EU in the world trade order dwarfs their disagreements. These proponents should avoid the temptation to signal the virtues of one partner by denigrating the other and creating appealing, but largely false, fundamental differences. Those narratives, setting up epic conflicts between the forces of “good and evil,” are exciting but have profound negative effects in the real world.
• Identify priority areas for coordination and work most intensely and cooperatively on those aspects for which there is maximum overlap of interest. US and EU government officials should focus now, ahead of and in early 2025, on specific priority issues that require the most intense coordination. Issues represented by the Global Arrangement on Steel and Aluminum—climate change, including CBAM and similar measures—and non-market policies and practices should top the list. For each of those priority issues, the parties should identify the areas of strongest overlap in interest and work intensely on those areas. Where there are significant differences in approach that cannot be entirely bridged, those should be cabined off and addressed separately. The United States and the EU should also agree on principles of cooperation that avoid casting aspersions on the other party.
• Build buy-in from all stakeholders. Finally, the United States and the EU’s joint work on identified priorities, and the messaging that accompanies that work, should be strongly informed by the broad US and EU stakeholder community—including business, agriculture, labor, NGOs, think tanks, and others. This would ensure that the priority areas of work are, in fact, those that have a meaningful real-life impact, and would crystallize a positive public narrative supporting that work, both domestically and internationally.

To improve the cooperative dynamic in 2025, the United States and the EU should focus less on whether one is from Mars and the other from Venus, and more on the planet they share: Earth.

L. Daniel Mullaney is a nonresident senior fellow with the Atlantic Council’s Europe Center and GeoEconomics Center. He served as assistant US trade representative for Europe and the Middle East in the Office of the United States Trade Representative from 2010 to 2023.  

To read the report as it was published on the Atlantic Council webpage, click here.

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It won’t be easy. Ambitions to broaden and deepen the transatlantic marketplace suffer from past disappointments. The Transatlantic Trade and Investment Partnership foundered in disputes over hormone-treated beef and investor-state dispute settlement. The current EU-US Trade and Technology Council has produced only narrow benefits. In the absence of coordination, both Washington and Brussels have resorted to unilateral measures, such as the US Inflation Reduction Act, national security-related tariffs on steel and aluminum, and the EU’s doubling down on its long-proposed carbon border adjustment mechanism. In the future, the need to take urgent unilateral measures will only increase as the dire consequences of failing to act become clear.

A comprehensive transatlantic economic agreement—not a traditional trade agreement—could avoid relitigating the issues that have sunk past US-EU trade and investment initiatives. Rather, learning from the lessons of past efforts, Washington and Brussels must accept that, despite their shared interests, Europe and the United States have decidedly different economic cultures and polities. And any new comprehensive agreement should accommodate these differences while coordinating parallel approaches to the rapidly evolving global economy.

One pillar of such an agreement should be addressing third-country practices. Both the EU and the United States are currently implementing a lengthening list of defensive trade measures—tariffs on electric vehicles and solar panels and investment screening—to protect their domestic industries and workers from subsidized Chinese competition. Unless Washington and Brussels can agree on mutually reinforcing defensive measures, Beijing will simply exploit differences in future US and European market openness. Recent experience with US duties on Chinese subsidized steel and aluminum production painfully demonstrates that unilateral defensive trade measures can adversely impact European producers. Washington and Brussels have spent more time and effort fighting each other than jointly confronting China’s nonmarket practices.

A bilateral comprehensive agreement could identify a set of policies—the types and levels of state subsidies, the use of stolen intellectual property, state regulatory and other protectionist measures—that Washington and Brussels agree lead to “unfair” competition and thus merit parallel defensive measures that do not distort transatlantic commerce.  

The second pillar of a comprehensive agreement should be improved regulatory cooperation. Regulations often seem esoteric, but they set the rules of business behavior. In a world in which market-based economies are in competition with state-driven economies, the United States and the EU need regulations that reinforce each other, do not conflict, and do not inflict unnecessary collateral damage.

Regulatory cooperation is not about adopting identical rules (the United States and the EU have tried and failed before). Nor is it about forcing US and European regulators to sit down and talk with each other (which has produced little in the way of results). Rather, Washington and Brussels need to first agree that in a deeply integrated transatlantic economy, regulations should achieve their objectives without unnecessarily undermining bilateral trade. Second, they need to agree on joint pre-regulation research and information-gathering so that regulators are each working with a common set of facts. And the US and EU regulators need to offer each other’s stakeholders a meaningful opportunity to provide pre-standard-setting and pre-regulation input to minimize business friction.

Finally, successful coordination of external measures and future regulation will not be possible without a third pillar—greater ongoing input from the business, labor, consumer, environmental, and political communities. It is a fundamental principle of democracy that those affected by governmental actions have a right to participate in such decision making. But it is also practical. As the ones directly affected, these stakeholders can ensure that the issues addressed are of practical significance. In this regard, it is particularly important that the US Congress and European Parliament are fully involved as negotiations proceed, to ensure that whatever is agreed upon has a chance of entering into force.

As both Brussels and Washington face an uncertain and challenging 2025 and beyond, they cannot afford to allow past failures to constrain future ambitions. They face too many shared challenges. Going forward, the EU and the United States can either row together in increasingly turbulent waters, or they will most assuredly sink separately.

L. Daniel Mullaney is a nonresident senior fellow with the Atlantic Council’s Europe Center and GeoEconomics Center. He served as assistant US trade representative for Europe and the Middle East in the Office of the United States Trade Representative from 2010 to 2023. He was chief negotiator for comprehensive trade agreements with the EU and the United Kingdom, as well as trade lead for the US-EU Trade and Technology Council.

Bruce Stokes is a visiting senior fellow at the German Marshall Fund, a former senior fellow at the Council on Foreign Relations and the former international economics correspondent for the National Journal.

To read the blog as it was published on the The Atlantic Council webpage, click here.

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