[Interview] "Trump's Second Term Will Use All Means to Hit Tariffs First"

[Trump 2.0 US Expert Interview] ①
Robert Z. Lawrence, Harvard Kennedy School Professor
Many tools including Trade Expansion Act Sections 232 & 301
Possibility of trade with some countries using universal tariffs
Concerns over tariffs accelerating inflation and strong dollar
US-China hegemony competition presents opportunities for Korea

"Trump will start his second term by threatening tariff hikes. This is by no means an empty threat. He will mobilize every excuse and every means to impose tariffs on trading partners first."

Robert Z. Lawrence, a professor of international trade at Harvard Kennedy School, stated in a video interview with Asia Economy on the 10th (local time) regarding the outlook of the U.S. trade and commerce policy after Donald Trump, the 47th President-elect of the United States, takes office, "Trump's philosophy of using tariffs as a means to resolve trade deficits is firm."

He expected that, as Trump has previously announced, he would immediately impose a universal tariff of 10-20% on all countries and an ultra-high tariff of 60% on China. In particular, he predicted, "Trump may throw out the threat of tariffs and try to negotiate deals with some countries."

Professor Robert Z. Lawrence, Harvard Kennedy School

He also noted that the role of tariffs will grow larger in Trump's second term. Previously, tariffs were a means to resolve trade deficits, revive domestic manufacturing, and decouple (disengage) from China, but now tariffs are also being used as an additional revenue source to offset tax revenue losses caused by income tax cuts and other reductions. Professor Lawrence said, "Trump sees tariffs as a useful tool to address multiple issues," and diagnosed, "Now he intends to use trade policy as a means to achieve goals beyond trade."

He viewed that Trump's second term has various means to raise tariffs. Professor Lawrence said, "Although the main authority over U.S. trade and commerce policy lies with Congress, the president has considerable discretion to impose tariffs without congressional approval," adding, "He can apply Section 232 of the Trade Expansion Act citing national security threats, Section 301 for unfair trade practices, and various legal bases such as the International Emergency Economic Powers Act (IEEPA), enabling him to take any measures." Given the president's broad discretion and the increased likelihood that the Republican Party, to which Trump belongs, will control both the Senate and the House, Trump's second-term tariff policy is considered to have a turbo engine."

Regarding the outlook for demands to renegotiate the Korea-U.S. Free Trade Agreement (FTA) amid a sharp increase in Korea's trade surplus with the U.S., he saw all possibilities as open. Professor Lawrence said, "It is uncertain whether Trump will demand renegotiation of the Korea-U.S. FTA, but it seems unlikely that Trump will respect previous FTAs," adding, "However, the first target Trump will focus on is the United States-Mexico-Canada Agreement (USMCA)."

On whether universal tariff exemptions will be granted to FTA partner countries including Korea, he said, "Trump has not mentioned universal tariff exemptions for FTA partner countries so far, so it is difficult to predict." He added, "Trump tried to terminate the Korea-U.S. FTA during his first term, but a solution was found through negotiations, such as Korea agreeing to limit exports. This time, he may also try to negotiate with some countries by leveraging universal tariffs."

He cited the expansion of uncertainty caused by Trump's second-term trade policy as one of the biggest concerns. He also forecasted that inflation and a strong dollar could accelerate. Professor Lawrence said, "Trump's election means uncertainty for markets and companies," and predicted, "Tariffs and uncertainty can have a very significant impact on financial markets and private sector investment decisions."

He also predicted that raising tariffs could lead to higher product prices, wages, and a rebound in inflation. The expansion of fiscal deficits due to tax cuts is also expected to lead to increased government bond issuance and rising interest rates. With the prolonged high interest rates in the U.S. compounded by uncertainty stemming from Trump, demand for the safe-haven dollar is expected to increase further. This scenario is the exact opposite of Trump’s emphasis on a weak dollar to resolve trade deficits. Professor Lawrence pointed out, "Trump's policy is very contradictory."

Regulations related to advanced technologies such as semiconductors, electric vehicle batteries, and artificial intelligence (AI) targeting China are expected to continue in Trump's second term. Under the Joe Biden administration, the U.S. has accelerated decoupling efforts by restoring supply chains centered on its own country for semiconductors, electric vehicle batteries, and other sectors, and by imposing technology export controls on China. Professor Lawrence said, "The policy of the U.S. leading advanced technology industries and excluding China will continue in Trump's second term," adding, "The tough industrial and trade policy stance toward China is fundamentally similar between Trump's second term and the Biden administration." However, he expected that investment in eco-friendly technologies might slow down relatively during Trump's second term.

However, he pointed out that the effect of manufacturing supply chain restoration on job creation within the U.S. manufacturing sector is minimal. Both President Biden and President-elect Trump have claimed to revive U.S. manufacturing to increase jobs. He said, "It has been four years since the Biden administration took office, but compared to five years ago, U.S. manufacturing employment has increased by only 1%," adding, "Both the Democratic and Republican parties shout about rebuilding manufacturing to gain support from swing states in the Rust Belt (Pennsylvania, Wisconsin, Michigan), but this policy does not create real opportunities or changes for workers." According to Professor Lawrence, even if large-scale investment plans by companies resulting from the implementation of the CHIPS and Science Act (CSA) and the Inflation Reduction Act (IRA) are fully realized, they will only create about 1% of total U.S. employment.

He said, "Advanced technology manufacturing such as semiconductors, electric vehicle batteries, and nanotechnology is important, but these are not sectors that create many jobs," and pointed out, "These new technologies require highly skilled personnel and use automated robots in production. The American belief that manufacturing is a ladder or escalator to the middle class is merely nostalgia for the past."

Professor Lawrence evaluated the accelerating U.S.-China hegemonic competition in Trump's second term as an "opportunity" for Korea. He emphasized, "Korea can maintain friendly relations with both sides while gradually reducing dependence on China, a major market, and establish itself as a key supplier to the U.S. Korea is in a position to leverage the U.S.-China conflict, so the decoupling of the two countries is not bad for Korea. Korea can have opportunities from both the U.S. and China."

About Professor Robert Z. Lawrence

Professor Robert Z. Lawrence is one of the leading experts in international trade and commerce in the United States. He served on the President's Council of Economic Advisers at the White House from 1998 to 2000, and has been a senior fellow at the Brookings Institution and a professor at Yale University. He currently holds positions as a professor of international trade at Harvard Kennedy School, a senior fellow at the Peterson Institute for International Economics (PIIE), and a researcher at the National Bureau of Economic Research (NBER). He earned his Ph.D. in economics from Yale University.