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한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском AbstractPurpose The purpose of this paper is to analyse the international political economy of Korea and its effects due to geopolitical tension between China and the USA. Design/methodology/approach Economic war between China and the USA has prolonged longer than expected. Aftermath of the COVID-19 pandemic, reforming the supply chain has been the centre of economic tension between China and the USA. Quite recently, with the rapid expansion of Chinese e-commerce platforms, distribution channels come upon a new economic tension between the two. And now is the time to pivot its pattern of conflict from competition into cooperation. In this end, economic diplomacy could be a useful means to give a signal of cooperation. From the view of economic diplomacy, this paper tries to analyse the projected transition of economic war between China and the USA with its implication on the trade policy of Korea. Findings As an implementation of economic diplomacy, China suggested the Belt and Road Initiative (BRI), enhancing trade logistics among related countries to gain competitiveness. In 2023, the Biden administration suggested the India-Middle East and Europe Economic Corridor as a counter to BRI, which will be a threshold for changing trade policy from economic war into economic diplomacy. As a result, it is expected China and the USA will expand their economic diplomacy in a way to promote economic cooperation among allied states, while the distribution channel war would continue to accelerate the economic tension between China and the USA. Korea has to prepare for and provide measures handling this geopolitical location in its trade policy or economic diplomacy. Originality/value This research contributes to the awareness and understanding of trade environments from the perspective of economic diplomacy. 1. Introduction The advent of globalisation has led to widespread economic integration, creating global production networks and markets. However, the COVID-19 pandemic has acted as a significant setback to this trend. In the wake of COVID-19, an economic war has arisen between China and the USA, centred on the restructuring of global supply chains following widespread disruptions. International political economy (IPE) examines the power dynamics between states and the structures of influence within regional economies. Consequently, economic diplomacy has gained unprecedented attention. Economic diplomacy focuses on government actions regarding international economic issues, distinct from political diplomacy through its market-oriented approach in foreign policy. Putnam (1988) categorises economic diplomacy into two levels: unilateralism and bilateralism. Unilateral economic diplomacy (or unilateralism) often relies on hard power, involving decisions on trade liberalisation or market protection without negotiation. Bilateral economic diplomacy (or bilateralism) or multilateral economic diplomacy (or multilateralism), by contrast, involves negotiation among trade partners, resulting in agreements such as regional or global free trade agreements (FTAs). A vast range of state or non-state actors engage in economic diplomacy, navigating the complex interplay between international and domestic factors. Defining economic diplomacy is extremely challenging, but one useful definition is “the broad concept of economic statecraft, where economic measures are taken in the pursuit of political goals, including punitive actions such as sanctions” (Blanchard and Ripsman, 2008).  Figure 1 Recent trend of economic diplomacy To exert influence internationally, ministers and heads of government strive to demonstrate their capacity for national security through two primary approaches, as shown in Figure 1 (above): economic war (or competition) and economic diplomacy (or international cooperation). In the context of global supply chain restructuring, the economic conflict between China and the USA has intensified, marked by threats of supply chain disruptions. This has led to emerging strategies aimed at “crowding out” the USA from global supply chains (去美戰略) or excluding China through alliances such as the Allied Supply Chain and Chip 4. While economic war is inherently “temporary” due to its painstaking nature, economic diplomacy or international cooperation offer a more “long-term” approach because it is gains-taking. This paper analyses the factors contributing to the prolonged nature of this economic war and explores potential outcomes of the supply chain tensions between China and the USA from the perspectives of IPE or geo-economics. In conclusion, it highlights the importance of preparing for trade policy adjustments and strategic economic diplomacy. 2. International trade war and strategic items2.1 Supply chain The supply chain encompasses a network of interconnected suppliers involved in each stage of production, from raw materials and components to the finished goods or services. This network can include vendors, warehouses, retailers, freight stations and distribution centres. Effective supply chain management is a “crucial process because an optimised supply chain results in lower costs and a more efficient production cycle” [1]. Within the supply chain, a leading company typically holds governance power, enabling it to coordinate scheduling and exercise control across the interconnected suppliers, resulting in reduced costs and shorter production times (Gereffi et al., 2005) [2]. Since the 2000s, forward and backward integration have been key strategies for managing time, cost and uncertainty in supply chains. For example, Toyota’s Just-In-Time (JIT) system demonstrated the efficiency of locally concentrated supply chains until disruptions from the 2011 East Japan Earthquake and the Thailand flood. Following supply chain shutdowns in 2020, many businesses shifted from local to global supply chains, utilising advancements of the information technology (IT) and transportation technologies to geographically diversify operations. As the need for a systematically functioning global supply chain has grown, a leading nation, much like a leading company, often assumes governance power in international trade and investment, as illustrated in Figure 2 (below), by aligning with the leadership of a dominant market competitiveness, which makes this leadership valuable.  Figure 2 Supply chain The COVID-19 pandemic dealt a severe blow to the global supply chain, causing sudden lockdowns that led to widespread supply chain disruptions. To mitigate the risks of future global disruptions, supply chains have begun restructuring to operate on a more regionally segmented basis. In this shift toward regional supply chains, China and the USA are at the centre, drawing allied countries within their spheres of influence. This alignment helps explain why the economic war between China and the USA has lasted longer than anticipated. 2.2 Strategic items China has restricted exports of two rare metals, gallium and germanium, which are critical to semiconductor production. Kraljic (1983) highlighted the importance of managing “strategic items” within the framework of supply chain management, as shown in Figure 3. Kraljic emphasises the need to strengthen and diversify critical items. The Kraljic matrix provides a valuable tool for identifying essential items that require focused management within the supply chain.  Figure 3 Kraljic matrix Kraljic identified the importance of managing “bottleneck items” in strategic supply chain management – items that present high supply risk but have relatively low business value. Due to the potential costs associated with non-delivery or compromised quality of strategic items, these must be closely monitored and controlled. From a risk management perspective, establishing medium-term business relationships and collaboration with suppliers is essential. For example, South Korea imports over 90% of its urea for agricultural and industrial purposes from China [3]. Heavily dependent on China for urea supplies due to pricing factors, Korea faced challenges when China imposed export controls on urea, underscoring Korea’s vulnerability within China’s sphere of influence. The European Union (EU) also faces challenges with critical raw materials (CRMs). China remains the EU’s sole supplier of processed rare earth elements, while Chile supplies 79% of its lithium. In response, the EU introduced the CRM Act (CRMA) to support projects aimed at increasing “the EU’s capacity to extract, process, and recycle strategic raw materials and diversify supplies from the third countries” [4]. 2.3 Resilient supply chain alliance In contrast to China’s approach of leveraging supply disruptions to strengthen its influence, the Biden administration in the USA has adopted a cooperative approach focused on building resilient supply chains (Pillar 2) through the Indo-Pacific Economic Framework (IPEF), which includes 14 member countries [5]. The need for resilient supply chains has been further underscored by the Russia–Ukraine crisis. The IPEF aims to address supply chain vulnerabilities by fostering global efforts to reduce risks associated with concentrated, fragile supply chains [6].  Figure 4 Resilient supply chain alliance In Figure 4, the EU Commission presented the Single Market Emergency Instrument (SMEI) in September 2022, a crisis governance framework designed to ensure the availability of essential goods and services during future emergencies. The SMEI operates on three levels: contingency planning, vigilance and emergency. The contingency planning phase focuses on collaboration among member states to mitigate supply chain disruption and monitor incidents. The vigilance phase can be activated when a significant disruption is anticipated, enabling specific measures such as mapping and monitoring supply chains and production capacities. Finally, the emergency phase is activated in cases of severe disruption to the functioning of the single market [7]. Establishing a resilient supply chain through international cooperation may be appealing, yet the reality often falls short of the ambition. In South Korea, the IPEF took effect on 17 April 2024, after an extended negotiation process, marking the first multilateral agreement on supply chains. As a result, during non-crisis periods, the 14 member countries will collaborate to strengthen international trade, investment and trade logistics. In times of crisis, member countries will activate a “crisis response network”. Conversely, opportunities for negotiation with China, South Korea’s largest trading partner, are essential for building supply chain resilience [8]. China has pursued an industrial policy focused on enhancing its supply chain management capabilities. In the semiconductor sector, the decoupling between China and the USA has become increasingly evident. Contrary to expectations, China has adopted a policy of internalising its supply chains, returning to the integration strategies of the 2000s rather than furthering globalisation. A promising opportunity for transformation between the two countries has emerged recently. Since 2015, China and South Korea have maintained bilateral FTA, and with the second phase of FTA negotiations currently underway, there is an opportunity to strengthen trade and investment ties, fostering positive progress through international cooperation. 2.4 China manufacturing exodus During the COVID-19 pandemic, China imposed sudden lockdowns without prior notice or preparation, halting production and logistics cycles. This “zero COVID” policy may have triggered a shift towards “de-risking” China from supply chain disruptions. Although China still offers significant advantages as “the factory of the world,” with vast market potential, prolonged trade tensions with the USA, intensified during the Trump administration, have prompted global manufacturers with substantial USA market bases to relocate operations amid rising geopolitical uncertainties. For example, Nike and Adidas have shifted much of their footwear manufacturing to Vietnam, Apple has begun iPhone production at a Foxconn in Chennai, India, and AstraZeneca has contracted production with India’s Serum Institute. In the pre-globalised era, defining the Rule of Origin (ROO) was straightforward, as a product’s components were usually manufactured and assembled within a single country. However, with the complexity of global supply chains, particularly since 2012, determining ROO has become a time-consuming and subjective process. ROO are classified as either non-preferential or preferential. The USA applies non-preferential ROO to restrict imports from countries like Cuba, Iran and North Korea, while offering trade preference programmes for others. Preferential ROO are used to determine duty-free eligibility for imports from approved countries [9], whereas non-preferential ROO play a crucial role in “country of origin labelling, government procurement, enforcement of trade remedy actions, compilation of trade statistics, supply chain security issues.” [10] China manufacturing exodus may negatively impact capital inflows into Hong Kong, traditionally seen as the Gateway to China. In 2023, Hong Kong’s initial public offering volume fell to a 20-year low of $5.9bn [11]. While China-oriented business remains in Hong Kong, which returns fully to Chinese control in 2047, non-China-oriented businesses have migrated to Singapore. As the certainty of contract and ownership rights forms the foundation of capitalism, this capital flight from Hong Kong is likely to persist. 3. Trade logistics and economic corridors Globalisation has allowed supply chains to leverage interdependence and interconnectedness, maximising efficiency. However, while these efficiencies have been beneficial, they have also created a fertile ground for friction between trade partners due to a “survival of the fittest” mindset and the principle of “winner takes all.” This interdependence has also highlighted vulnerabilities; the global supply chain struggled to manage the disruptions caused by COVID-19, prompting a shift towards regional integration initiatives, such as Association of Southeast Asian Nations, Regional Comprehensive Economic Partnership, United States–Mexico–Canada Agreement and Comprehensive and Progressive Agreement for Trans-Pacific Partnership. As the global economy seeks stability, collaboration over competition has become increasingly essential, with economic diplomacy emerging as a priority. The prolonged economic war between China and the USA arguably needs to shift towards economic diplomacy. The global supply chain is restructuring into regional supply chains, building resilience by operating in regional segments that can withstand crises. Michael Porter introduced the concept of value chain as “a set of activities that a firm performs to deliver a valuable product or service to the market.” [12] Complex finished goods often depend on global value chains, traversing multiple countries. As shown in Figure 5, the value chain consists of supply chain and trade channel components. While the focus has traditionally been on which country holds lead status within a regional supply chain, the emphasis is now shifting to how these regional segments can be interconnected and relayed. In this context, the supply chain competition may evolve into a “channel war” in international trade, where trade logistics will centre on the internal flow of goods, standardising channel processes and establishing authority over these channels.  Figure 5 Supply chain v. trade channel 3.1 Trade logistics It is natural for governments to seek environments that enhance competitiveness within in their countries. In terms of trade, effective trade logistics are essential for maintaining competitive advantage. As a prerequisite, a strong IT management infrastructure is indispensable. As shown in Figure 6, trade logistics encompass the internal flow of goods to market, integrating physical infrastructure with operating software – such as transport hubs, warehouses, highways, ports, terminals, trains and shipping vessels. Key areas of conflict in trade logistics involve the standardisation of channel processes and determining who holds governance over operation of these logistics systems. This is equally relevant within the digital economy. Recently, Chinese e-commerce – often referred to as C-commerce – has aggressively sought to gain control over digital distribution channels, interconnected delivery networks and trade logistics via digital platforms. Chinese platforms such as Taobao, Temu and AliExpress are actively working to increase their monthly active users (MAUs), positing themselves as counterweights to USA-based platforms such as Amazon and eBay in digital trade [13].  Figure 6 Trade logistics When the agenda of establishing international trade logistics is introduced to relevant trade members across various countries, initial progress and effective responses are often achieved. However, efforts soon encounter obstacles related to standardising logistics processes and establishing operational governance. Greater reliance on international institutions could help resolve these issues (Bayne, 2017). Yet governments frequently prioritise domestic interests, and after prolonged negotiations, the risk of international agreements failing increases. Amid the economic war between China and the USA, China launched a trade logistics initiative known as the Belt and Road Initiative (BRI), or One Belt One Road, in 2013. Often referred to as the New Silk Road, the BRI aims to establish economic corridors for trade logistics. The World Bank estimates that the BRI could boost trade flows by 4.1% and reduce trade costs by 1.1% [14]. In response, the Biden administration proposed the India-Middle East and Europe Economic Corridor (IMEC) in September 2023 to strengthen transport and communication links between Europe and Asia as a countermeasure to China’s BRI. IMEC has been well received by participating countries, with expectations of fostering economic growth, enhancing connectivity and potentially rebalancing trade and economic relations between the EU and China [15]. Both BRI and IMEC are ambitious projects aimed at boosting international trade through substantial investments in trade logistics infrastructure. Each seeks to assert governance over international trade channels, signalling that the supply chain war may soon evolve into a trade channel war between China and the USA. 3.2 Economic corridors Economic corridors are transport networks designed to support and facilitate the movement of goods, services, people and information. These corridors often include integrated infrastructure, such as highways, railways and ports, linking cities or even countries (Octaviano and Trishia, 2014). They are typically established to connect manufacturing hubs, high-supply and high-demand areas, and producers of value-added goods. Economic corridors comprise both hard infrastructure – such as trade facilities – and soft infrastructure, including trade facilitation and capacity-building measures. The Asian Development Bank introduced the term “economic corridor” in 1998 to describe networks connecting various economic agents within a region [16]. Economic corridors are integrated trade logistics networks, providing essential infrastructure for connecting regional segments of supply chains. As supply chains increasingly operate in regional “chunks,” linking these segments becomes ever more important. Economic corridors typically include a network of transport infrastructure, such as highways, railways, terminals and ports. Initiatives like the BRI and IMEC use economic corridors as instruments of economic diplomacy, shifting strategies from hard power to soft power, as shown in Figure 7. Because less-developed or developing countries often lack sufficient funding to invest in trade logistics, they tend to welcome these initiatives from developed countries, which offer international collaboration and support. However, these initiatives usually come with the condition that participating countries must accept standardised trade processes and governance led by the sponsoring developed country.  Figure 7 Economic corridor initiatives as economic diplomacy To succeed, economic corridors must meet three key conditions [17]. First, government intervention is essential, as economic corridor initiatives primarily involve public infrastructure investments beyond the scope of the private sector. In realising these projects, governments must reconcile three tensions to ensure their policies are mutually supportive: tensions between politics and economics, between international and domestic pressures and between governments and other stakeholders. Second, intermediate outcomes should be measured and demonstrated as results of economic corridors, allowing participants to experience tangible benefits throughout these longer-term projects. Finally, economic corridors should deliver broader benefits. Participants need incentives to utilise the infrastructure sustainably. These benefits may extend beyond economic welfare, such as wages and income, to include social inclusion, equity and environmental gains, which support the long-term viability of the infrastructure. 4. BRI vs IMEC4.1 Belt and Road Initiative (BRI) - Silk Road The BRI can be a modern-day realisation of the Silk Road concept, connecting Europe as a market base with China as a production base. Unlike the ancient Silk Road, which connected trade routes across Eurasia, the BRI poses potential challenges due to its extensive connectivity. Firstly, there are social and environmental externalities, such as increased congestion and accidents from concentrating traffic flows through limited links and nodes within trade networks. Secondly, while the connectivity may benefit the production and market bases at either end, regions situated between these hubs, through which highways and railways pass, may gain minimal advantage. Thirdly, there is often a mismatch between where costs and benefits are realised. Transit regions that facilitate network traffic often see fewer direct benefits compared to high-density nodes within the network. 4.2 India-Middle East and Europe Economic Corridor (IMEC) - The Spice Road The ancient Spice Roads once connected the Middle East and Northeast Africa with Europe, facilitating the exchange of goods such as cinnamon, ginger, pepper and cassia, which, like silk, served as a form of currency. The IMEC proposes a modern route from India to Europe through the United Arab Emirates (UAE), Saudi Arabia, Israel and Greece. Since its announcement in September 2023, some regional experts have expressed reservations about its feasibility, particularly regarding the connection between the Middle East and Israel. The project has faced delays due to the Israel–Hamas war. Despite these challenges, IMEC holds potential to drive economic growth and strengthen connectivity, especially as countries like Vietnam and India emerge as alternative manufacturing bases for companies relocating from China. For Saudi Arabia and the UAE, IMEC is not viewed as a challenge to China but rather as an opportunity to diversify their economies and solidify their roles within the Middle East region [18]. 5. Conclusion A new trade war between China and the USA has begun, with the Biden Administration’s introduction of IMEC as a counter to China’s BRI. This shift could soon transform the nature of economic war from a focus on supply chains to one on trade channels. The China manufacturing exodus was further accelerated by supply disruptions during the COVID-19 pandemic. Amidst the economic tensions between China and the USA, the restructuring of global supply chains into regional networks has made significant progress. With China maintaining its stance on export controls for strategic items, South Korea must prepare for resilient supply chain management. In relation to China–Korea FTA, which is currently undergoing its second phase of negotiation, South Korea should seek clarity on the transparency of China’s strategic item controls. The Committee on Foreign Investment in the United States (CFIUS) plays a key role in monitoring the quality of inbound investments; similarly, South Korea is experiencing increased inbound investment due to the manufacturing shift from China and should apply similar standards to evaluate investment quality. This emerging economic war between China and the USA is now marked by the competing initiatives of the BRI and IMEC. The BRI can be viewed as a modern Silk Road, linking China with Europe, while the IMEC seeks to establish a trade logistics corridor connecting Saudi Arabia, the UAE, Israel and Greece. The South Korean Government should take proactive steps to prepare for the evolving dynamics of the trade war between China and the USA. CitationOh, J.S. (2025), "International trade war - Spice Road against Silk Road", International Trade, Politics and Development, Vol. 9 No. 1, pp. 2-11. https://doi.org/10.1108/ITPD-06-2024-0031  Notes 1. https://www.investopedia.com/terms/s/supplychain.asp2. According to Gary Gereffi et al, 5 governance types of a lead company could be categorised as market, modular, relational, captive and hierarchy.3. Korea imports urea from 12 countries including Qatar, Vietnam, Indonesia and Saudi Arabia, in addition to China.4. https://single-market-economy.ec.europa.eu/sectors/raw-materials/areas-specific-interest/critical-raw-materials/strategic-projects-under-crma_en5. IPEF was launched on May 23,2022 at Tokyo. 14 member countries are Australia, Brunei, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, Vietnam and the USA. 4 Pillar of IPEF are Trade (Pillar 1), Supply Chain (Pillar 2),Clean Economy (Pillar 3) and Fair Economy (Pillar 4).6. Critics say “lack of substantive actions and binding commitments, instead focusing on process-driven framework building.” https://www.piie.com/blogs/realtime-economics/its-time-ipef-countries-take-action-supply-chain-resilience7. https://ec.europa.eu/commission/presscorner/detail/en/ip_22_54438. As of 2023, the first-largest trade partner of Korea is China (Trade volume of $267.66bn), the second is the US ($186.96bn) and the third is Vietnam ($79.43bn)9. As preferential ROO contain the labour value content requirement in the USMCA, it could increase compliance costs for importers. https://crsreports.congress.gov/product/pdf/RL/RL3452410. USITC(1996), Country of Origin Marking: Review of Laws, Regulations and Practices, USITC Publication 2975, July, pp. 2–411. https://www.barrons.com/articles/hong-kong-financial-center-china-46ba5d3612. Porter identifies a value chain broken in five primary activities: inbound logistics, operations, outbound logistics, marketing and sales and post-sale services. https://www.usitc.gov/publications/332/journals/concepts_approaches_in_gvc_research_final_april_18.pdf13. MAU is a metric commonly used to identify the number of unique users who engage with apps and website. MAU is an important measurement to the level of platform competitiveness in the digital trade logistics or e-commerce industry.14. https://home.kpmg/xx/en/home/insights/2019/12/china-belt-and-road-initiative-and-the-global-chemical-industry.html15. https://www.bradley.com/insights/publications/2023/10/the-india-middle-east-europe-economic-corridor-prospects-and-challenges-for-us-businesses16. The Asian Development Bank (ADB), which first used the term in 1998, defines economic corridors as important networks or connections between economic agents along a defined geography, which link the supply and demand sides of markets. http://research.bworldonline.com/popular-economics/story.php?id=350&title=Economic-corridors-boost-markets,-living-conditions17. Legovini et al. (2020) comments traditional cross border agreements of transport investment focuses only on a narrow set of direct benefits and cost. However, economic corridors can entail much wider economic benefits and costs such as trade and economic activity, structural change, poverty reduction, pollution and deforestation.18. Arab Centre Washington D.C. https://arabcenterdc.org/resource/the-geopolitics-of-the-india-middle-east-europe-economic-corridor/ References Bayne, N. (2017), Challenge and Response in the New Economic Diplomacy, 4th ed., The New Economic Diplomacy, Routledge, London, p. 19.Blanchard, J.M.F. and Ripsman, N.M. (2008), “A political theory of economic statecraft”, Foreign Policy Analysis, Vol. 4, pp. 371-398, doi: 10.1111/j.1743-8594.2008.00076.x.Gereffi, G., Humphrey, J. and Sturgeon, T. (2005), “The governance of value chain”, Review of International Political Economy, Vol. 12 No. 1, pp. 78-104, doi: 10.1080/09692290500049805.Kraljic, P. (1983), “Purchasing must be supply management”, Harvard Business Review, Vol. 61 No. 5, September.Legovini, A., Duhaut, A. and Bougna, T. (2020), “Economic corridors-transforming the growth potential of transport investments”, p. 10.Octaviano, B.Y. and Trishia, P. (2014), Economic Corridors Boost Markets, Living Conditions, Business World Research, Islamabad, October.United States International Trade Commission (USITC) (1996), “Country of origin marking: Review of Laws, Regulations, and Practices”, USITC Publication, Vol. 2975, July, pp. 2-4.Further readingPorter, M. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press.Putman, R.D. (1988), “Diplomacy and domestic politics; the logic of two-level games”, International Organization, Vol. 42 No. 4, pp. 427-600.USITC (2019), “Global value chain analysis: concepts and approaches”, Journal of International Commerce and Economics, April, pp. 1-29.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском The tariff war launched by US President Donald Trump has entered a phony war stage. But the next six months will reveal the true impact of a threatened trade war. The 8-month period in 1939–40 after Hitler’s invasion of Poland but before major Nazi attacks on the Allies was called the ‘phony war’. It was a time of high uncertainty but relative calm, with a hope in some quarters that the worst risks had been avoided. Today, the pace of the tariff war launched by US President Donald Trump on ‘Liberation Day’ seems to be following the same trajectory. The reaction of ‘shock and awe’ at the pace of action during Trump’s first hundred days culminated with the 2 April announcement of ‘reciprocal tariffs’ imposed on friends and foes alike. The president used executive orders as his legal tool, and Truth Social as his personal communications channel, to dominate the news and evade normal checks and balances. His new tariff regime threw financial markets into a panic and threatened complex global supply chains. A tit-for-tat escalation of tariffs on China added fuel to the fire. Then, within days, the phony war period began with the pausing of most threatened tariffs and the partial reductions negotiated with China. This buoyed the financial markets, reassuring some that the disruptions of President Trump’s first hundred days were part of a strategy that would settle into a pattern of more deals and less economic damage. The partial trade deal with the UK was reassuring, while the latest skirmish between the US and the EU keeps suspense high. But postponing the application of threatened tariffs is more of a ceasefire in Trump’s trade war, not a resolution. Much less a surrender. Positive signs, but backward looking Recent data provide some superficial reasons to be positive about the health of the US economy. US corporate earnings in the first quarter came in mostly on track. Share prices of big tech companies have regained much of the value they had lost in the wake of Liberation Day. US inflation fell slightly in April to an annual rate of 2.3 per cent, showing little sign of impact from tariffs. Even the unwelcome surprise of the 0.3 per cent fall in first quarter GDP (on an annual basis) was partly explained by a surge in imports as US companies built up their inventories to prepare for the tariff threat. All of this data, of course, is backward looking. There are early indications, and strong reasons to believe, that the real damage is yet to come and that the US is entering a period of stagflation that will lead to a recession by the end of this year. Inflation prospects First, consider inflation. While in May the Consumer Price Index (CPI) fell slightly compared to a year ago, it ticked up slightly in April compared to a month ago. That was a reversal in  the first monthly reading after the Liberation Day announcements. The widely watched survey of US consumer sentiment produced by the University of Michigan hit a near record low in May, sliding to 50.8 – just shy of the all-time low seen in June 2022. The survey pinpointed tariffs as leading to that decline in confidence, based on worries about a renewed surge of inflation.  The same survey of expected inflation 12 months ahead rose to an astonishing 7.3 per cent, up from 6.5 per cent expected in April. Were that to become reality it would be the US’s highest level since 1981. Businesses too are concerned. The chief executive of Walmart has warned that ‘even at reduced levels, the higher tariffs will result in higher prices.’ The Yale Budget Lab estimates that the overall US effective tariff rate is now 17.8 per cent compared to 2.5 per cent when President Trump took office in January. There can be little doubt that such a jump in tariffs will spur a rise in inflation in the coming months. A further risk will develop if the large tax cut  package under consideration by Congress results in a substantial rise in the government deficit, which is already running close to 7 per cent of GDP this year. Moody’s credit rating agency downgraded its AAA rating on US government debt in May.  The labour market is tight, with unemployment hovering around 4 per cent.  Fiscal stimulus applied to an economy that is near full employment is a classic recipe for higher inflation. While these risks remain, it is unlikely that the US Federal Reserve will be quick to cut interest rates. Indeed, in its May meeting, it voted to leave interest rates on hold, despite calls from President Trump to lower them. Fed Chair Jerome Powell said ‘We can move quickly when that’s appropriate, but we think right now the appropriate thing to do is wait and see how things evolve.’ This is the prudent policy when there are two-sided risks in a stagflationary environment. Growth prospects Now consider the prospects for growth, where expectations and international repercussions are especially important. The drop in consumer confidence has been cited above.  Many large companies declined to provide sales or earnings forecasts with their Q1 results due to the uncertain environment. The chief executive of Maersk, the global shipping giant, warned that world trade volumes could contract by up to 4 per cent this year – compared to their previous projection of 4 per cent growth. Exports account for 29 per cent of global GDP. A contraction in global trade would represent a global supply shock to growth, not only for the US but especially for trade-intensive countries and regions such as the EU. The end of the ‘phony war’ As July approaches and the tariff ceasefires are due to end, this ‘phony war’ period will evolve into a spreading recognition of the real economic consequences of a trade war. Between now and then, the US may sign a few more deals. But current negotiations with the EU have stalled, provoking new threats by the US and then an agreed deadline of 9 July for more negotiations. Even if a short-term EU–US deal can be agreed, it will still leave US tariffs on EU goods substantially higher than before. Anxiety will build, stockpiles of imported goods will be running down, and businesses will see profits fall. Meanwhile, the US debt ceiling of $36 trillion is fast approaching and a Congressional agreement will be needed sometime between mid–July and early October if the US is to avoid default, according to the Bipartisan Policy Center. The usual brinkmanship will roil financial markets. These next six months will reveal the true impact of the threatened trade war. Uncertainty will give way to damage limitation in the form of higher prices to reflect higher costs, lower consumer demand and postponed investment.  The likelihood of two or three more quarters of below zero growth in the US is high. The irony is that as long as the US consumes more than it produces, higher US tariffs will do little to shrink the US trade deficit. But a tariff-induced recession in the US probably will.  

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском Abstract The defining political shift of our era is the revolt of the lower middle class. Much more exposed than the better-off to the succession of crises in recent years—from the financial crisis to uncontrolled migration, from Covid-19 to Russia’s aggression against Ukraine—the lower middle class is turning to the populist right and its promise of protection by closure. Unlike the US first-past-the-post system, the EU’s institutional framework emphasises compromise and cross-party cooperation and thus offers a critical buffer against this wave of disruption. But this is not enough to protect our post-1945 political order, which is based on parliamentary democracy, the rule of law and European integration, from both internal and external threats. The EU needs a bold agenda that focuses on competitiveness, growth, migration and defence, all of which are crucial to strengthening our continent. Introduction1 Once is an accident, twice the new normal. With his electoral success, Donald Trump is the new reality in the US, not just an aberration. Trump obviously understands his time better than anybody else, which ensured him his comeback as president of the US, elected by the people against seemingly overwhelming legal and political resistance. He is the new rule of the game, like it or not. The revolt of the lower middle classWhat is the new reality? The party political system in the US and Europe has been fundamentally transformed by the revolt of the lower middle class. Voter analyses in several European countries give a clear picture: in France, Marine Le Pen and the National Rally (Rassemblement National) represent the ‘défavorisés’ like no other party and have replaced in that function the traditional left. Le Pen is successful in the former Communist heartland and mining territory of northern France, where she also assured her own seat in parliament (Ipsos 2024). Similarly, Alternative for Germany (Alternative für Deutschland, AfD) is electorally over-represented among workers and the unemployed and those with below average incomes and education (Moreau 2024a). And the Freedom Party of Austria (Freiheitliche Partei Österreichs, FPÖ) rallies the workers too (Moreau 2024b). This should not come as a big surprise. Right-wing populist parties have been recognised in political science as unconventional workers’ parties for more than a decade (Rydgren 2013). And the transformation of the political space in Europe has been ongoing for more than a decade as well. European Parliament elections are an excellent monitor of the overall situation in Europe and the member states. The outcome of the 2024 European Parliament elections shows us a political space that is basically divided into three parts. One-third of the members now sit on the left, organised in the Green, Socialist and Left groups; a good third are in the centre, encompassing the Liberals and the Christian Democrat European People’s Party (EPP); and close to a third now belong to the populist and radical right (European Parliament 2024). In the US, Trump’s success was assured in 2016 through gains in the ‘rustbelt states’, formerly the Democrat Party’s heartland. In 2020 Joe Biden was able to narrowly turn the tide. With his credibility among workers—acquired over decades through close cooperation with the trade unions—he was able to achieve what presidential candidates from liberal New York and California, Hillary Clinton and Kamala Harris, could not. The Republican Party today is the Make America Great Again Party. It is the party of Donald Trump. The Republican Party of Ronald Reagan and George Bush does not exist anymore. The party that used to represent the highly skilled today represents and owes its electoral success to the lower-skilled working class. ‘National security Republicans’ have lost their political home. Why is the lower middle class revolting? The lower middle class can be identified as those whose economic situation is tense. In other words, they have no financial buffer and anything unexpected happening can push them over the edge. In the US, this group, known as those living ‘from paycheque to paycheque’, is considered to comprise 25% to 30% of the population. A single paycheque not arriving might force people belonging to this group to sell their car; several paycheques not arriving might oblige them to sell their house (Bank of America Institute 2024). Ever since the financial crisis that started in 2008, we have gone in Europe from crisis to crisis. The drawn-out financial crisis was followed by uncontrolled migration as a consequence of Russia’s bombardment of big cities in Syria, and this was followed by Covid-19 and then Russia’s aggression against Ukraine, which caused major spikes in energy and food prices and another massive wave of migration. What we call a ‘crisis’ might equally be considered a lack in performance of the system overall and an indication of increasing loss of control. Russia is being aggressive militarily and in other ways because it believes it can do so and get away with it. External borders prove time and time again to be porous. After the Second World War, the German economy grew by an average of about 5% per year; but in the last five years, this has dropped to 0% and even into the negative. What can be weathered by the better-off is an existential challenge for the lower middle class. If you are not already on the housing ladder by luck of birth, it is increasingly difficult to get onto. The social elevator is stuttering. And while migration is perceived by the upper middle class as the promise of affordable personal services today and care in old age later, for the lower middle class it means competition for affordable housing and state services, and the risk of decreasing educational standards for children in their lower-income living areas. German sociologist Andreas Reckwitz (2020) describes the experience of the lower middle class as one of a double devaluation: economic and cultural. It is economic because formerly well-paid industrial workers are falling increasingly behind the new university-educated service class. And it is cultural because their system of traditional values is regarded as outdated and destined to be superseded. From a horizontal to a vertical understanding of the party political system The traditional horizontal classification of parties on a left to right axis is very misleading now. To understand what is happening, we need to replace the traditional horizontal classification with a vertical one based on social status, income and education. On the basis of the 2021 German federal election and data provided by the Bundestag (data no longer available online) and others (Focus online 2021), we can construct such a vertical system for Germany: 1. Greens and liberals represent younger voters, with a very good income in the case of the liberals and an average income, but outstanding level of education, when it comes to the greens, the new party of the Bildungsbürgertum (the very well-educated). These voters can together be considered the upper middle class and the most dynamic part of society.2. The traditional people’s parties, the Christian Democrats and the Social Democrats, become more popular the older the cohort, with their popularity rocketing among those above 70 years old. The income levels of the voters of these parties are average, as is their education, and this voter base is shrinking. These parties represent the middle class.3. The Left (Die Linke) is over-represented among academics and the unemployed; its electorate has a below-average income. The extreme-right AfD is over-represented among workers, the unemployed and people of working age. The educational levels of these voters are low, and their household incomes are below average. The Left and the AfD both represent the lower middle class. The part of the lower middle class that is represented by the populist right is being promised protection by closure. Right-wing populism is therefore ‘social nationalism’. But it is not just about the programme. Bringing that new coalition of various social groups together is facilitated by charismatic leadership: Trump is a charismatic leader in the sense of Max Weber (1921); and he finds his European equivalents in the likes of Nigel Farage, Boris Johnson, Marine Le Pen and Viktor Orbán. Moreover, the dominance of social media over the traditional media has dramatically decreased the cost of political organisation and provided a chance for newcomers to establish themselves. Social media have also normalised hate, which was banned from the traditional media for very good reasons after the dramatic experiences of racism, National Socialism and Communism in the twentieth century. Political parties based on portraying political adversaries as enemies in the tradition of Carl Schmitt (2007) are profiting more than any other from these new tools. What differentiates Europe from the US? Party political competition in the US If we are observing a revolt of the lower middle class in both the US and Europe, why has the impact been so different up to now? In the US the first-past-the-post system forces everybody to integrate into one of the two major political parties, the Democrats and the Republicans. Both parties therefore represent very large coalitions, which essentially serve an electoral purpose only and cannot be considered programme parties. The fight for content takes place mainly within, among the different caucuses organised in Congress. What you would find in the European Parliament in the EPP, the European Conservatives and Reformists, the Patriots and the Sovereigntists is, in the US, all assembled in one political family, the Republicans. Equally, what you would find in the liberal Renew group, the Socialists and Democrats, the Greens and the Left in Europe has to cohabit within the Democrat Party in the US. The Republican Party can be understood as a broad political coalition which has effectively fallen under the control and leadership of what in Europe might rather be considered the line of Viktor Orbán and the Patriots. The other tendencies are still there but marginalised. They can no longer determine the overall direction but might still be sufficiently strong in Congress to block decision-making or align with the other side when they regard policies as being against their core convictions, such as creating unsustainable debt levels, or on matters related to national security and defence.Europe and its national electoral systemsEuropean states are not immune either. The British, the French and the Hungarian electoral systems provide an oversized seat result for the relatively strongest party, and this increases the opportunities of the extremes. Brexit can be considered one outcome of this. The current political stalemate in France, where the extreme right and the extreme left are holding the system hostage, is another. In systems of pure proportional representation, by contrast, you need more than 50% of the votes for one party or a coalition of several parties to take effective political control. In a first-past-the-post system, as in the US, 20%–30% of the electorate is more than sufficient to take over one of the major political parties and, with that, to potentially run the country. Pure proportional systems therefore provide better protection against a right-wing or left-wing populist takeover. The EU political system On the federal level of the EU on the other hand, the incentives are there for cooperation across the political centre. Decisions in the Council need an oversized qualified majority; the election of a European Commission president by the European Parliament requires an absolute majority of the members elected to the house. These majorities can regularly be found only through cooperation across the aisle and by transcending the traditional left–right schism. The desire to hold important political offices in the EU, therefore, requires a willingness to compromise and forces political parties that are more on the right or on the left to look towards the centre. The final vote on the von der Leyen Commission was carried by a large cross-cutting alliance of the Christian Democrat EPP, the liberal Renew and the Socialists, complemented by the constructive right, centred on Italian Prime Minister Giorgia Meloni, and the constructive left, led by the German Greens. The more radical elements of both the European Conservatives and Reformists and Green groups voted against. The institutional system has a strong impact on the political culture in the EU, which is a culture of cooperation. The political system favours the creation of unity—as the condition for stability on a historically, geographically and culturally divided continent—and therefore the centre. The absence of permanent coalitions and the lack of fixed roles of majority and minority in the division of power in the EU create the opportunity to integrate those on the very right and the very left who are not opposed to the system as such and whose primary aim is not to destroy it: the constructive right and the constructive left. Contrary to the US, where the destructive and anti-system elements can dominate the rest of their respective coalitions, inside the EU that destructive right and left find themselves isolated unless they stop being the system opposition. That is why Ursula von der Leyen was well advised to integrate Raffaele Fitto from Brothers of Italy (Fratelli d’Italia) as vice-president of the European Commission and, at the same time, to continue a constructive dialogue with the co-leader of the Green group Terry Reincke on the importance of climate change policies and actions to preserve the rule of law. Brothers of Italy had not only supported the new asylum pact, in contrast to Viktor Orbán, but had also supported Ukraine in a steadfast fashion, including in the vote to ensure Ukraine profits from the interest on Russian assets. Brothers of Italy is part of the constructive right, stabilising the political system of the EU. Is the EU therefore safe? The EU is a federal union of citizens and states and therefore dependent on support in each and every member state. It is only as strong as its weakest link. Even though, on average, support for EU institutions is close to historical highs and well above the support levels for national institutions, that is not enough (EU 2024). Before Brexit the EU’s weakest link in terms of overall support was the UK. Nowadays its weakest link is France, which is paralysed by the combination of a destructive right, on the one hand, and on the other, a destructive left which, in the form of France Unbowed (La France Insoumise), is holding the socialists and greens hostage. And both extremes are cooperating in the destabilisation of the state. That smells like Weimar. What needs to be done? An agenda for the next phase of European integration An agenda for strength In the worlds of Trump, Vladimir Putin and Xi Jinping, strength is the only thing that counts. Internationally and geopolitically, we are back in the world of nineteenth-century power politics. The rules of the game have changed, and the quicker we understand this the better. We are threatened at the same time from the inside and from the outside. From the inside, by the destructive nationalist populist right and left that are trying to hollow out the political order, established after 1945, based on parliamentary democracy, the rule of law and European integration. From the outside, by aggressive nationalist power politics. And more often than not, these two are connected. The seatbelts need to be fastened. Defending ourselves from threats both inside and outside has to start with the recognition that we are confronted with real issues, not just imagined ones. Hyper-inflation was real and is still stored in today’s price levels. The accumulated inflation during Joe Biden’s four-year term was above 20% (US Bureau of Labour Statistics n.d., author’s calculations), and it will not have been very different in Europe. Growth rates are very low, while debt is rising, and with it the difficulty of states to intervene in times of absolute need. Uncontrolled mass immigration happened. Our capacity to defend our continent is seriously compromised. International respect comes from strength, not from weakness. This is not a case for mass psychotherapy, but political action: the political agenda has to change. The European Parliament nowadays plays a key role in setting the agenda for the upcoming legislative term. Ursula von der Leyen had to negotiate with all the political forces of good will about the programme for the next five years to have any chance of being elected by an absolute majority of the members of the house. The need for the Commission president to negotiate the programme also changes the role of the European political foundations. The Wilfried Martens Centre for European Studies has contributed hundreds of precise policy proposals to the process of reflection in a document entitled The 7Ds for Sustainability. This text centres on defence, debt, digitalisation, demography, democracy, decarbonisation and de-risking globalisation in order to enrich the debate and help set a new agenda (Wilfried Martens Centre for European Studies n.d.). The outcomes of the European elections matter, as they should. With the Greens and the Liberals having together lost more than 50 seats and the so-called progressive majority between the Liberals, Greens, Socialists and the far left having disappeared, European Commission priorities for this legislature have markedly changed. Competitiveness and security, comprising both defence and migration, including border protection, have become the top two priorities. This is underpinned by the different composition of the European Commission and the European Council. With half of the members of both institutions coming from the EPP and the EPP occupying the centre space in the European Parliament as well, concerns about competitiveness, migration and defence, critical to strengthening our continent, which is being challenged from both within and without, now have a stronger voice. An agenda for growth: implementing the Draghi report Like every other policy paper, the Letta and Draghi reports can and are being discussed in detail. But no one can dispute the competence of Mario Draghi in matters monetary and economic. The Draghi report will therefore provide a most important reference point. His report comprises six basic truths that will inspire the legislative proposals of the European Commission in this term, even more so as it was requested by the European Commission president herself. Draghi brings everybody face to face with his or her responsibilities. From my personal reading, his report can be summarised as follows: • Investment is the precondition for future growth. Europe is lagging behind in high-tech investment and has largely lost the new digital economy race. This can be identified as the key reason for the difference in per capita growth between the US and the EU. Mid-tech–based industry, such as the car industry, which provides our current economic backbone, is coming under increasing competitive pressure from China.• Without investment, annual productivity growth falls behind. Europe could maintain and improve its living standard by considerably increasing female and older-age participation in the workplace. Worsening demographics make that quantitative input increase more difficult.• The EU has to return to the strategy of scaling through the development of its own internal market, especially in the less-integrated areas of the service sector.• The Banking Union and the Capital Markets Union are critical to assisting high-tech investors in their efforts to scale beyond national boundaries. Given that high-tech means not only high return but also high risk, venture capital is necessary to accompany that growth.• We have regulated for risk and not for opportunity, as is typical for ageing societies. The regulatory burden has to be reduced.• Common public debt has to come in as a residual answer, dependent in volume on the progress in the above-mentioned areas. Consensus on common European debt could be achieved in the area of defence, which could be considered a European public good. Common European financing would also contribute to more equal burden sharing. An agenda for migration Migration is at the core of right-wing populist parties’ growth. It brings together social and cultural challenges: social challenges in the form of competition for scarce public services and support, and cultural ones in the form of a challenge to traditional constructions of national and cultural identity. Here society is falling apart. What is a promise of improved personal services for the upper middle class and the liberal and green parties representing them is, for the lower middle class, a threat of lower salaries and increased competition for state services, including education. Experiences during the negotiations to form the current Swedish and Finnish governments showed that a tough policy on migration was the one area where populist parties were not ready to adapt or compromise. Preliminary voting analysis from the European Parliament demonstrates that while right-wing populist parties show some diverging views on economics, they clearly differentiate themselves from other political forces on the cultural axis of the political divide (Welle and Frantescu 2025). We have experienced a radicalisation of our political space following the events of mass migration, both in the Mediterranean and following Russia’s aggression in Syria and Ukraine. Russia even actively tries to destabilise its neighbours by transporting refugees to their common borders or via Belarus. Denmark is the only country in the EU that has managed to reduce established right-wing populist parties back to single digits. It has done so by establishing a consensus in society on a tough migration policy that is being continued by its current Social Democrat–led government. At the same time, Denmark represents a country with one of the highest standards of societal development. ‘Going to Denmark’ is even a reference in international development policy. Danish migration policy will therefore need to be studied in more detail so as to understand how far it can provide guidance for the EU as a whole or not. Speedier implementation of the migration pact voted on in the European Parliament in April 2024 therefore has to be a prime priority. But it cannot be the last step. Integration capacity has to become critical to migration policy. An agenda for defence Those who cannot defend themselves are inviting their stronger neighbours to aggress them. A look at maps of Russia over the last 500 years shows us that Russia has expanded continuously at the expense of its weaker neighbours—from basically the city territory of Moscow to becoming the largest state on earth. The military submission of its neighbours is the Russian business model. The peaceful and voluntary integration of the European space, based on the rule of law, is the business model of the EU. These concepts are now geographically colliding. And the grey zone in between, at the very least, is now in danger of Russian aggression and occupation, as demonstrated in Ukraine, where Russia is trying to reintroduce the logic of nineteenth-century empire to the European continent. The US will focus its own efforts increasingly on Asia and the attempt to contain China. Europe will therefore have to provide the lion’s share of its own conventional defence. This can only be effectively organised by making use of the possibilities provided by the EU. The Martens Centre has provided a plan in 10 steps—the European Defence Pyramid—on how to achieve a viable European defence under changed geopolitical circumstances. Starting with more basic ideas at the beginning, it has now been outlined in considerable detail with the help of external experts in The 7Ds for Sustainability – Defence Extended (Ciolan and Welle 2024). Progress is already visible. The Martens Centre suggested the creation of the office of a European defence commissioner and a standing defence committee in the European Parliament. Both are now reality. The proposed increase in financial support for military mobility has now been achieved through the decision of the European Commission to allow the use of regional funds for this purpose. And the new defence commissioner has suggested the creation of an ‘EU DARPA’2 for military research, as developed in the concept papers. Living in dangerous times Europe is being simultaneously challenged internally and externally: internally by right-wing populist parties, which have now conquered nearly 30% of the political space; externally by Russia, which is trying to reintroduce the nineteenth-century rules of empire through military aggression with at least the benevolent acceptance of China. These challenges are not unrelated. Some of the populist parties on the right and left openly make the case for China and Russia. Viktor Orbán’s Hungary has even been rewarded by China with massive investments and the status of an ‘all-weather partner’. Ever since the collapse of the Soviet Union in 1991, we have been living in a world of cooperation. System competition between East and West was replaced by globalisation. System seemingly did not matter anymore. Production went wherever it was the cheapest. Communist China became the capitalists’ best friend in exchange for the transfer of superior technology. In analogy to Lenin, China sold the capitalists the rope with which to hang themselves. The price paradigm replaced the security paradigm. With China now so strong that it can and does challenge the US economically and politically for number-one status globally, and strongly on the rise militarily, this phase has ended. China is preparing for the military strangulation, if not occupation of Taiwan, as demonstrated by its ever more menacing sea exercises around the island every year. Russia waged a war against Ukraine only days after establishing a ‘no limits partnership’ with China, testing the global order established after 1945 when conquering and annexing the territory of a weaker neighbour was outlawed. The West is being challenged both in Asia and in Europe. To defend our European way of life we need to be strong economically and militarily. We need to close the rifts in our societies and constructively end the revolt of the lower middle class. System competition is back, and the security paradigm has replaced the price paradigm. Cite:  Welle, K. (2025). Donald Trump, the revolt of the lower middle class and the next phase of European integration. European View, 0(0). https://doi.org/10.1177/17816858251345566 Footnotes 1. This article is a revised version of an article that originally appeared on the website of the research centre Groupe d’études géopolitiques on 19 March 2025 with the title ‘Trump and the next phase of European integration’. See https://geopolitique.eu/en/2025/03/19/after-trump-the-next-phase-of-european-integration/. Used by permission.2. The Defense Advanced Research Projects Agency is a US Department of Defense agency focused on developing breakthrough technologies for national security. References Bank of America Institute. (2024). Paycheck to paycheck: What, who, where, why? 22 October. https://institute.bankofamerica.Com/content/dam/economic-insights/paycheck-to-paycheck-lower-income-households.pdf. Accessed 24 April 2025.Ciolan I. M., Welle K., eds. (2024). The 7Ds for sustainability – Defence extended. https://www.martenscentre.eu/publication/the-7ds-defence-extended/. Accessed 24 April 2025.EU. (2024). Standard Eurobarometer 102 – Autumn 2024. https://europa.eu/eurobarometer/surveys/detail/3215. Accessed 24 April 2025.European Parliament. (2024). European Parliament 2024–2029. Constitutive session. https://results.elections.europa.eu/en/european-results/2024-2029/. Accessed 24 April 2025.Focus online. (2021). Wer wählte wie? Die Analyse. 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International efforts, such as the Paris Agreement, aim to reduce greenhouse gas emissions. But experts say countries aren’t doing enough to limit dangerous global warming. Summary Countries have debated how to combat climate change since the early 1990s. These negotiations have produced several important accords, including the Kyoto Protocol and the Paris Agreement. Governments generally agree on the science behind climate change but have diverged on who is most responsible, how to track emissions-reduction goals, and whether to compensate harder-hit countries. The findings of the first global stocktake, discussed at the 2023 UN Climate Summit in Dubai, United Arab Emirates (UAE), concluded that governments need to do more to prevent the global average temperature from rising by 1.5°C. Introduction Over the last several decades, governments have collectively pledged to slow global warming. But despite intensified diplomacy, the world is already facing the consequences of climate change, and they are expected to get worse. Through the Kyoto Protocol and Paris Agreement, countries agreed to reduce greenhouse gas emissions, but the amount of carbon dioxide in the atmosphere keeps rising, heating the Earth at an alarming rate. Scientists warn that if this warming continues unabated, it could bring environmental catastrophe to much of the world, including staggering sea-level rise, devastating wildfires, record-breaking droughts and floods, and widespread species loss. Since negotiating the Paris accord in 2015, many of the 195 countries that are party to the agreement have strengthened their climate commitments—to include pledges on curbing emissions and supporting countries in adapting to the effects of extreme weather—during the annual UN climate conferences known as the Conference of the Parties (COP). While experts note that clear progress has been made towards the clean energy transition, cutting current emissions has proven challenging for the world’s top emitters. The United States, for instance, could be poised to ramp up fossil fuel production linked to global warming under the Donald Trump administration, which has previously minimized the effects of climate change and has withdrawn twice from the Paris Agreement. What are the most important international agreements on climate change? Montreal Protocol, 1987. Though not intended to tackle climate change, the Montreal Protocol [PDF] was a historic environmental accord that became a model for future diplomacy on the issue. Every country in the world eventually ratified the treaty, which required them to stop producing substances that damage the ozone layer, such as chlorofluorocarbons (CFCs). The protocol has succeeded in eliminating nearly 99 percent of these ozone-depleting substances. In 2016, parties agreed via the Kigali Amendment to also reduce their production of hydrofluorocarbons (HFCs), powerful greenhouse gases that contribute to climate change. UN Framework Convention on Climate Change (UNFCCC), 1992. Ratified by 197 countries, including the United States, the landmark accord [PDF] was the first global treaty to explicitly address climate change. It established an annual forum, known as the Conference of the Parties, or COP, for international discussions aimed at stabilizing the concentration of greenhouse gases in the atmosphere. These meetings produced the Kyoto Protocol and the Paris Agreement. Kyoto Protocol, 2005. The Kyoto Protocol [PDF], adopted in 1997 and entered into force in 2005, was the first legally binding climate treaty. It required developed countries to reduce emissions by an average of 5 percent below 1990 levels, and established a system to monitor countries’ progress. But the treaty did not compel developing countries, including major carbon emitters China and India, to take action. The United States signed the agreement in 1998 but never ratified it and later withdrew its signature.  Paris Agreement, 2015. The most significant global climate agreement to date, the Paris Agreement requires all countries to set emissions-reduction pledges. Governments set targets, known as nationally determined contributions (NDCs), with the goals of preventing the global average temperature from rising 2°C (3.6°F) above preindustrial levels and pursuing efforts to keep it below 1.5°C (2.7°F). It also aims to reach global net-zero emissions, where the amount of greenhouse gases emitted equals the amount removed from the atmosphere, in the second half of the century. (This is also known as being climate neutral or carbon neutral.) The United States, the world’s second-largest emitter, is the only country to withdraw from the agreement, a move President Donald Trump made during his first administration in 2017. While former President Joe Biden reentered the agreement during his first day in office, Trump again withdrew the United States on the first day of his second administration in 2025. Three other countries have not formally approved the agreement: Iran, Libya, and Yemen. Is there a consensus on the science of climate change? Yes, there is a broad consensus among the scientific community, though some deny that climate change is a problem, including politicians in the United States. When negotiating teams meet for international climate talks, there is “less skepticism about the science and more disagreement about how to set priorities,” says David Victor, an international relations professor at the University of California, San Diego. The basic science is that:• the Earth’s average temperature is rising at an unprecedented rate; • human activities, namely the use of fossil fuels—coal, oil, and natural gas—are the primary drivers of this rapid warming and climate change; and,• continued warming is expected to have harmful effects worldwide. Data taken from ice cores shows that the Earth’s average temperature is rising more now than it has in eight hundred thousand years. Scientists say this is largely a result of human activities over the last 150 years, such as burning fossil fuels and deforestation. These activities have dramatically increased the amount of heat-trapping greenhouse gases, primarily carbon dioxide, in the atmosphere, causing the planet to warm. The Intergovernmental Panel on Climate Change (IPCC), a UN body established in 1988, regularly assesses the latest climate science and produces consensus-based reports for countries. Why are countries aiming to keep global temperature rise below 1.5°C? Scientists have warned for years of catastrophic environmental consequences if global temperature continues to rise at the current pace. The Earth’s average temperature has already increased approximately 1.1°C above preindustrial levels, according to a 2023 assessment by the IPCC. The report, drafted by more than two hundred scientists from over sixty countries, predicts that the world will reach or exceed 1.5°C of warming within the next two decades even if nations drastically cut emissions immediately. (Several estimates report that global warming already surpassed that threshold in 2024.) An earlier, more comprehensive IPCC report summarized the severe effects expected to occur when the global temperature warms by 1.5°C: Heat waves. Many regions will suffer more hot days, with about 14 percent of people worldwide being exposed to periods of severe heat at least once every five years. Droughts and floods. Regions will be more susceptible to droughts and floods, making farming more difficult, lowering crop yields, and causing food shortages.  Rising seas. Tens of millions of people live in coastal regions that will be submerged in the coming decades. Small island nations are particularly vulnerable. Ocean changes. Up to 90 percent of coral reefs will be wiped out, and oceans will become more acidic. The world’s fisheries will become far less productive. Arctic ice thaws. At least once a century, the Arctic will experience a summer with no sea ice, which has not happened in at least two thousand years. Forty percent of the Arctic’s permafrost will thaw by the end of the century.  Species loss. More insects, plants, and vertebrates will be at risk of extinction.  The consequences will be far worse if the 2°C threshold is reached, scientists say. “We’re headed toward disaster if we can’t get our warming in check and we need to do this very quickly,” says Alice C. Hill, CFR senior fellow for energy and the environment. Which countries are responsible for climate change? The answer depends on who you ask and how you measure emissions. Ever since the first climate talks in the 1990s, officials have debated which countries—developed or developing—are more to blame for climate change and should therefore curb their emissions. Developing countries argue that developed countries have emitted more greenhouse gases over time. They say these developed countries should now carry more of the burden because they were able to grow their economies without restraint. Indeed, the United States has emitted the most of all time, followed by the European Union (EU).   However, China and India are now among the world’s top annual emitters, along with the United States. Developed countries have argued that those countries must do more now to address climate change.   In the context of this debate, major climate agreements have evolved in how they pursue emissions reductions. The Kyoto Protocol required only developed countries to reduce emissions, while the Paris Agreement recognized that climate change is a shared problem and called on all countries to set emissions targets. What progress have countries made since the Paris Agreement? Every five years, countries are supposed to assess their progress toward implementing the agreement through a process known as the global stocktake. The first of these reports, released in September 2023, warned governments that “the world is not on track to meet the long-term goals of the Paris Agreement.” That said, countries have made some breakthroughs during the annual UN climate summits, such as the landmark commitment to establish the Loss and Damage Fund at COP27 in Sharm el-Sheikh, Egypt. The fund aims to address the inequality of climate change by providing financial assistance to poorer countries, which are often least responsible for global emissions yet most vulnerable to climate disasters. At COP28, countries decided that the fund will be initially housed at the World Bank, with several wealthy countries, such as the United States, Japan, the United Kingdom, and EU members, initially pledging around $430 million combined. At COP29, developed countries committed to triple their finance commitments to developing countries, totalling $300 billion annually by 2035. Recently, there have been global efforts to cut methane emissions, which account for more than half of human-made warming today because of their higher potency and heat trapping ability within the first few decades of release. The United States and EU introduced a Global Methane Pledge at COP26, which aims to slash 30 percent of methane emissions levels between 2020 and 2030. At COP28, oil companies announced they would cut their methane emissions from wells and drilling by more than 80 percent by the end of the decade. However, pledges to phase out fossil fuels were not renewed the following year at COP29. Are the commitments made under the Paris Agreement enough? Most experts say that countries’ pledges are not ambitious enough and will not be enacted quickly enough to limit global temperature rise to 1.5°C. The policies of Paris signatories as of late 2022 could result in a 2.7°C (4.9°F) rise by 2100, according to the Climate Action Tracker compiled by Germany-based nonprofits Climate Analytics and the NewClimate Institute. “The Paris Agreement is not enough. Even at the time of negotiation, it was recognized as not being enough,” says CFR’s Hill. “It was only a first step, and the expectation was that as time went on, countries would return with greater ambition to cut their emissions.” Since 2015, dozens of countries—including the top emitters—have submitted stronger pledges. For example, President Biden announced in 2021 that the United States will aim to cut emissions by 50 to 52 percent compared to 2005 levels by 2030, doubling former President Barack Obama’s commitment. The following year, the U.S. Congress approved legislation that could get the country close to reaching that goal. Meanwhile, the EU pledged to reduce emissions by at least 55 percent compared to 1990 levels by 2030, and China said it aims to reach peak emissions before 2030. But the world’s average temperature will still rise more than 2°C (3.6°F) by 2100 even if countries fully implement their pledges for 2030 and beyond. If the more than one hundred countries that have set or are considering net-zero targets follow through, warming could be limited to 1.8˚C (3.2°F), according to the Climate Action Tracker.   What are the alternatives to the Paris Agreement? Some experts foresee the most meaningful climate action happening in other forums. Yale University economist William Nordhaus says that purely voluntary international accords like the Paris Agreement promote free-riding and are destined to fail. The best way to cut global emissions, he says, would be to have governments negotiate a universal carbon price rather than focus on country emissions limits. Others propose new agreements [PDF] that apply to specific emissions or sectors to complement the Paris Agreement.  In recent years, climate diplomacy has occurred increasingly through minilateral groupings. The Group of Twenty (G20), representing countries that are responsible for 80 percent of the world’s greenhouse gas pollution, has pledged to stop financing new coal-fired power plants abroad and agreed to triple renewable energy capacity by the end of this decade. However, G20 governments have thus far failed to set a deadline to phase out fossil fuels. In 2022, countries in the International Civil Aviation Organization set a goal of achieving net-zero emissions for commercial aviation by 2050. Meanwhile, cities around the world have made their own pledges. In the United States, more than six hundred local governments [PDF] have detailed climate action plans that include emissions-reduction targets. Industry is also a large source of carbon pollution, and many firms have said they will try to reduce their emissions or become carbon neutral or carbon negative, meaning they would remove more carbon from the atmosphere than they release. The Science Based Targets initiative, a UK-based company considered the “gold standard” in validating corporate net-zero plans, says it has certified the plans of  over three thousand firms, and aims to more than triple this total by 2025. Still, analysts say that many challenges remain, including questions over the accounting methods and a lack of transparency in supply chains. Recommended Resources This timeline tracks UN climate talks since 1992. CFR Education’s latest resources explain everything to know about climate change.  The Climate Action Tracker assesses countries’ updated NDCs under the Paris Agreement. CFR Senior Fellow Varun Sivaram discusses how the 2025 U.S. wildfires demonstrate the need to rethink climate diplomacy and adopt a pragmatic response to falling short of global climate goals. In this series on climate change and instability by the Center for Preventive Action, CFR Senior Fellow Michelle Gavin looks at the consequences for the Horn of Africa and the National Defense University’s Paul J. Angelo for Central America. This backgrounder by Clara Fong unpacks the global push for climate financing.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском Nearly a fifth of the energy generated in the region never makes it to usage. Experts call for more energy planning, investment and control Latin America has made significant steps towards its energy transition. The region already generates 60% of its electricity from renewable sources, a figure that the International Energy Agency expects to continue to rise. However, there is one factor in this journey that receives limited attention – and is affecting the potential to reduce greenhouse gas emissions from energy. Energy losses – the difference between the amount of electricity generated and the amount that is ultimately accounted for via consumer bills – averaged 17% per year in Latin America over the past three decades, according to a report by the Inter-American Development Bank (IDB). It says this is three times higher than in developed countries. That represents between five and six million tonnes of carbon dioxide emissions per year, equivalent to the emissions of 1.3 million cars. Specialists have termed these as “compensatory emissions”, as more electricity generation is required to compensate for the losses. Countries with a higher share of fossil fuel generation, such as Argentina, Mexico and Colombia, are mainly responsible for these additional emissions. Energy losses affect all countries in the region and occur for both technical and non-technical reasons. The former refers to problems in transmission and distribution lines, mostly due to a lack of investment and infrastructure maintenance; the latter corresponds to energy delivered and not paid for by users, such as theft and energy fraud. “Energy losses have the potential to affect the fulfilment of the climate targets,” Ana Lía Rojas, executive director of the Chilean Association of Renewable Energy and Storage (Acera), tells Dialogue Earth. “Every unit of energy that is lost means more generation is needed to meet demand.” Energy losses Most electricity is produced in power plants and sent over long distances through high-voltage transmission lines. It then reaches consumers through the distribution network – the poles and wires that connect homes and businesses. This infrastructure can suffer from various problems that result in technical energy losses. For example, losses due to the resistance of the conductive material through which the energy flows, ageing infrastructure and malfunctioning transformers. While these are inherent problems in electricity transmission, experts agree that there is a general lack of investment in transmission and distribution networks across Latin America. “Decision-makers prioritise having energy, and the grid is left as a second priority. You have to invest in parallel in the grid and in generation – it’s about seeing the system as a whole,” Ramón Méndez, Uruguay’s former energy director, tells Dialogue Earth. “A deficient infrastructure can become a major economic and technical problem.” Between 2015 and 2021, investment in distribution and transmission infrastructure in the region fell by about 40%. Not only can this lead to energy losses, but it also leaves grids more exposed to extreme weather events and can lead to service problems, which particularly affect vulnerable populations. In Latin America, most electricity losses occur in the distribution system. This is mostly due to non-technical factors, such as energy theft, says Santiago López Cariboni. A professor of economics at the University of the Republic of Uruguay, he co-authored the IDB’s energy losses report. “It is energy that is produced and transported, but not consumed legally. People break or tamper with meters or run a cable straight from the grid to their homes or businesses,” López Cariboni tells Dialogue Earth. “Even if governments could cut off the power to all those homes, they wouldn’t do it – it would create a huge social and economic problem.” A user that steals energy consumes up to three times more than one that does not, estimates López Cariboni. By not paying a tariff, people have no incentive to consume less or to have low-consumption technology. According to the IDB report, irregular connections are related to the disorderly growth of Latin American cities in recent decades. The dumping of energy Although it does not generate emissions, renewable energy can also generate a problem of energy losses. This has happened recently in Chile. The share of solar and wind energy reached a record 40% of the country’s energy generation in 2024. However, as their weight in the mix increases, so do energy losses. This phenomenon, also known as curtailment, occurs because the development of renewable projects is progressing much faster than available transmission and storage capacity. In 2024, 5,900 gigawatt hours (GWh) of power were wasted in Chile, 148% more than in 2023. The figure represents 20% of the solar and wind energy generated by the country, estimates Lía Rojas. Jorge Leal Saldivia, a partner at the Chilean renewable energy company LAS Energy, says this wasting corresponds mainly to solar energy generated in the north of the country. “The transmission infrastructure is not in place to be able to bring that energy to central and southern Chile. The lines become congested, and the energy has to be dumped,” he tells Dialogue Earth. Rodrigo Palma, a researcher at the Energy Centre of the University of Chile, tells Dialogue Earth there have been delays in energy planning: “The entry into operation of solar and wind has not stopped, and the rate of entry is greater than the rate of capacity-building by the state. This may slow down the penetration of renewables into our energy system.” By 2040, all coal-fired power plants will have to cease operating in Chile. This is expected to be mostly compensated for by renewable energy. In April, the government announced a tender for eight new projects to upgrade the grid, adding to 12 projects launched last year. One of the biggest initiatives, the Kimal-Lo Aguirre transmission line, is now under review after complaints from social and environmental groups. Possible solutions Half of the 26 countries analysed in the IDB report have experienced greater energy losses in recent years, highlighting the urgent need for solutions. Honduras, Venezuela and the Dominican Republic lose more than 30% of their energy, followed by more than 20% in Jamaica, Paraguay and Guyana. The IDB also highlights how grids face increasing vulnerability and impacts due to climate change. Specialists consulted by Dialogue Earth highlight the need for comprehensive planning by governments to address losses. For technical losses, the incorporation of technology can help, such as smart meters and storage. For the non-technical ones, a social policy perspective needs to be added, says López Cariboni. “Societies justify energy theft by necessity; they see energy as a right,” he explains. “For those who can pay, you can work with sanctions and regulations. But for those who can’t, the state should formalise those losses and take it as part of their budget. It’s more public expenditure, but it’s an expenditure that is already being made.” Martin Dapelo, a member of the board of directors for the Argentine Chamber of Renewable Energies (Cader), questions the lack of progress in the region on smart metering. “It is the first big step. We are missing out on the possibility of measuring in real time,” he tells Dialogue Earth. In storage, Chile has so far been the only country in the region to take the first steps. Distributed generation – energy generated by consumers themselves in small-scale, localised systems – is also on the region’s solutions list. These arrangements place solar or wind farms at the site of consumption, for example among housing or industry. This removes the need for energy transportation, avoiding grid overload. “We have gotten used to the idea that planning has to be indicative, and that it is the market that decides which direction to take with the energy sector. The case of Chile, with an oversupply of solar, but without transmission grids, shows that this is not the case,” say Méndez. “The optimal system is one that looks at the whole and determines the best combination.” This article was originally published by Dialogue Earth under the Creative Commons BY NC ND licence

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском Last week, the Trump administration signed a deal with Ukraine that gives it privileged access to Ukraine’s natural resources. Some news outlets described the deal as Ukrainian President Volodymyr Zelensky “caving” to US President Donald Trump’s demands. But we see the agreement as the result of clever bargaining on the part of Ukraine’s war-time president. So, what does the deal mean for Ukraine? And will this help strengthen America’s mineral supply chains? Ukraine’s natural resource wealth Ukraine is home to 5% of the world’s critical mineral wealth, including 22 of the 34 minerals identified by the European Union as vital for defence, construction and high-tech manufacturing. However, there’s a big difference between resources (what’s in the ground) and reserves (what can be commercially exploited). Ukraine’s proven mineral reserves are limited. Further, Ukraine has an estimated mineral wealth of around US$14.8 trillion (A$23 trillion), but more than half of this is in territories currently occupied by Russia. What does the new deal mean for Ukraine? American support for overseas conflict is usually about securing US economic interests — often in the form of resource exploitation. From the Middle East to Asia, US interventions abroad have enabled access for American firms to other countries’ oil, gas and minerals. But the first iteration of the Ukraine mineral deal, which Zelensky rejected in February, had been an especially brazen resource grab by Trump’s government. It required Ukraine to cede sovereignty over its land and resources to one country (the US), in order to defend itself from attacks by another (Russia). These terms were highly exploitative of a country fighting against a years-long military occupation. In addition, they violated Ukraine’s constitution, which puts the ownership of Ukraine’s natural resources in the hands of the Ukrainian people. Were Zelensky to accept this, he would have faced a tremendous backlash from the public. In comparison, the new deal sounds like a strategic and (potentially) commercial win for Ukraine. First, this agreement is more just, and it’s aligned with Ukraine’s short- and medium-term interests. Zelenksy describes it as an “equal partnership” that will modernise Ukraine. Under the terms, Ukraine will set up a United States–Ukraine Reconstruction Investment Fund for foreign investments into the country’s economy, which will be jointly governed by both countries. Ukraine will contribute 50% of the income from royalties and licenses to develop critical minerals, oil and gas reserves, while the US can make its contributions in-kind, such as through military assistance or technology transfers. Ukraine maintains ownership over its natural resources and state enterprises. And the licensing agreements will not require substantial changes to the country’s laws, or disrupt its future integration with Europe. Importantly, there is no mention of retroactive debts for the US military assistance already received by Ukraine. This would have created a dangerous precedent, allowing other nations to seek to claim similar debts from Ukraine. Finally, the deal also signals the Trump administration’s commitment to “a free, sovereign and prosperous Ukraine” – albeit, still without any security guarantees. Profits may be a long time coming Unsurprisingly, the Trump administration and conservative media in the US are framing the deal as a win. For too long, Trump argues, Ukraine has enjoyed US taxpayer-funded military assistance, and such assistance now has a price tag. The administration has described the deal to Americans as a profit-making endeavour that can recoup monies spent defending Ukrainian interests. But in reality, profits are a long way off. The terms of the agreement clearly state the fund’s investment will be directed at new resource projects. Existing operations and state-owned projects will fall outside the terms of the agreement. Mining projects typically work within long time frames. The move from exploration to production is a slow, high-risk and enormously expensive process. It can often take over a decade. Add to this complexity the fact that some experts are sceptical Ukraine even has enormously valuable reserves. And to bring any promising deposits to market will require major investments. What’s perhaps more important It’s possible, however, that profits are a secondary calculation for the US. Boxing out China is likely to be as – if not more – important. Like other Western nations, the US is desperate to diversify its critical mineral supply chains. China controls not just a large proportion of the world’s known rare earths deposits, it also has a monopoly on the processing of most critical minerals used in green energy and defence technologies. The US fears China will weaponise its market dominance against strategic rivals. This is why Western governments increasingly make mineral supply chain resilience central to their foreign policy and defence strategies. Given Beijing’s closeness to Moscow and their deepening cooperation on natural resources, the US-Ukraine deal may prevent Russia — and, by extension, China — from accessing Ukrainian minerals. The terms of the agreement are explicit: “states and persons who have acted adversely towards Ukraine must not benefit from its reconstruction”. Finally, the performance of “the deal” matters just as much to Trump. Getting Zelensky to sign on the dotted line is progress in itself, plays well to Trump’s base at home, and puts pressure on Russian President Vladimir Putin to come to the table. So, the deal is a win for Zelensky because it gives the US a stake in an independent Ukraine. But even if Ukraine’s critical mineral reserves turn out to be less valuable than expected, it may not matter to Trump.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском The agreement was an acknowledgment of the significance of their trade for mutual economic development and the health of the global economy, the joint statement says. China and the US agreed to roll back high tariffs imposed on one another last month for a period of 90 days. The agreement was announced in a joint statement issued on Monday, May 12. The agreement was a result of a high-level meeting on trade and economic affairs held between Chinese and US delegations in Geneva, Switzerland over the weekend. As described in a press conference on Monday by the US Treasury Secretary Scott Bessent who was part of the US delegation, both sides have agreed to reduce the tariffs by 115%. That would mean that the US will reduce its tariffs on China to 30% from its present 145% while the Chinese will lower their tariffs to 10% from its present 125%. These new tariff rates would be effective from Wednesday for the next 90 days. Both the countries also agreed to explore a more stable arrangement in the interim period. China also agreed to reverse additional measures imposed in response to US President Donald Trump’s tariff war, such as putting various US companies on the sanctions list and placing export controls on rare earth minerals. The parties committed to taking these measures as an acknowledgment of the mutual significance of their bilateral trade and its importance for the global economy and for “moving forward in the spirit of mutual opening, continued communication, cooperation and mutual respect,” a joint statement says. The 30% US tariff includes a 10% baseline tariff imposed on all imports by Trump in April after suspending his reciprocal tariff regime for 90 days, and a 20% tariff imposed by the Trump administration before April in the name of stopping the illegal flow of the drug fentanyl. Answering a question on the cooperation between both the countries over fentanyl, the spokesperson of the Chinese Foreign Ministry Lin Jian criticized “the wrongly slapped tariffs on Chinese imports” by citing the issue and claiming that “if the US truly wants to cooperate with China, it should stop vilifying and shifting the blame.” Jian also advised the US “to seek dialogue with China based on equality, respect and mutual benefit.” Relief for the global economy  Trump announced a reciprocal tariff regime on April 2 against all those countries which had a trade surplus with the US, including China. After global backlash, Trump later postponed the implementation of the regime for 90 days, inviting countries to seek bilateral agreements to avoid high tariffs while imposing a 10% common tariff. The Trump administration had claimed that reciprocal tariffs were required in order to lower the US trade deficit, which is over a trillion dollars. China, the third largest trade partner of the US, faced the highest tariff rates under Trump’s tariff war and chose to retaliate. It also called the policy a violation of international law and an attempt by the US to weaponize trade. On Tuesday, Chinese President Xi Jinping reiterated his country’s position that there are no winners in trade and tariff wars, claiming bullying and hegemony will only result in self-isolation. He was addressing the fourth ministerial meeting of the China-CELAC (Community of Latin American and Caribbean States) forum in Beijing. The tariff war between the world’s leading economies was seen as a disaster for the global economy and trade. A large number of US businesses had also opposed Trump’s tariff war. They had claimed high tariffs may lead to a rise in prices which harm both the consumer and domestic production. Several businesses filed lawsuits in the US claiming Trump’s reciprocal tariff regime was illegal and harmful for their ability to do business. US trade representative Jamieson Greer, who was part of the negotiating team in Geneva, claimed that the talks with various countries, including China, is the first step to reducing the US trade deficit and ending the national emergency declared by Trump to authorize the reciprocal tariff decrees, South China Morning Post reported. The Chinese Ministry of Commerce also hailed the agreement as “substantive progress” for mutual economic development. It expressed hope that “the US side will build on the meeting, continue to work with China in the same direction, completely rectify its wrong practices of unilateral tariff hikes, and keep strengthening mutually beneficial cooperation.” Acknowledging that “high levels of tariffs were equivalent to an embargo and neither side wanted that,” Bessent declared on Monday that the US wants a trade relationship with China, though a balanced one. The Chinese Ministry of Commerce also hoped that the US would pursue the matter much more seriously and “inject more certainty and stability into the world economy.” Both the countries have agreed to establish “a joint mechanism” to continue their trade and economic negotiations in future. Text under Creative Commons Attribution-ShareAlike 4.0 (CC BY-SA) license

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском By assuming that trade relations are a zero-sum game in which one party must lose for the other to win, and that a trade deficit represents a loss while a surplus represents a win, President Trump reveals a simplistic view far removed from the dynamics of international trade. Let’s imagine that the global economy is Central America, that Costa Rica imports more goods than it exports, and that other countries accept paper printed by its Central Bank — bills in colones — as payment for their exports. Furthermore, let’s assume that a good portion of their trade surpluses are used to buy Costa Rican government bonds and make deposits in its banks, accepting — due to confidence in the strength of its economy — lower interest rates than they might obtain in other markets, and that those debts can be paid with the same printed paper. Trade deficits arise because a significant share of Costa Rican consumers and investors prefer to source final, intermediate, and capital goods from other Central American countries where prices are lower than at home. In other words, those deficits are the result of a national choice to enjoy a higher quality of life and greater productivity than what its economy would otherwise allow. Under these circumstances, Costa Rica, far from being a victim of other countries’ policies, would actually be enjoying levels of consumption above its means and economic growth beyond what its productivity would justify. The willingness of those countries to hold the colones derived from their trade surpluses in Costa Rican government bonds and bank deposits results in lower interest rates in Costa Rica. This enables a higher sustainable level of public debt, greater investment at low cost to improve infrastructure and service quality, and lower interest rates for private investment — all of which contribute to a higher rate of economic growth without endangering macroeconomic stability. In such a scenario, making imports more expensive through tariffs to boost local production competitiveness and eliminate trade deficits would, one by one, remove these advantages — amounting to nothing more than an own goal. This remains true even if Central American countries did not retaliate by restoring relative competitiveness to its starting point, and even if Costa Rican investors were not left uncertain about whether a future government might remove the tariffs. The U.S. economy faces the world in a situation identical to that hypothetical scenario of Costa Rica. It takes advantage of the fact that with paper printed by its central bank — the dollar — can pay for the real production of other countries, allowing it to live far beyond its means. Far from being “cheated” by other nations, as Trump claims, the United States enjoys a standard of living well above its capacity precisely because of this. That does not mean the U.S. is cheating anyone, since it is thanks to its economic strength that the rest of the world accepts that paper as a means of payment and trusts in its government bonds and banking system. Thus, by assuming that trade relations are a “zero-sum game” — where one must lose for the other to win — and that a trade deficit signals losing while a surplus signals winning, President Trump ignores these realities. He reveals a board-game level of simplification, detached from the complex chessboard that defines international trade dynamics. It is nothing less than a massive own goal. Trade deficits are an economic problem for countries like Costa Rica, which must pay for their imports using foreign currency, often requiring them to take on debt and/or attract foreign investment through subsidies and tax exemptions. This combination of factors permanently threatens macroeconomic stability and forces governments to limit spending on infrastructure and social services to free up resources to cover interest payments and the growing fiscal costs of structuring an economy based on incentives to foreign companies. Adding to the absurdity of Trump’s proposals, his goal is to achieve trade surpluses with every country in the world. However, the United States does not produce coffee or cocoa; thus, with some of the countries that export these products, running trade deficits is not only inevitable but also beneficial for the U.S. Many countries in the region, even without the advantages the United States enjoys, are unlikely to avoid trade deficits — for example, with oil-producing countries or those manufacturing goods that incorporate cutting-edge technologies. In such cases, raising tariffs could severely damage their economies. Trump boasts that the countries affected by the tariffs are lining up to renegotiate, claiming that this was his goal. If so, it marks the beginning of an uncertain period, contaminated by threats and blackmail, with China standing by to benefit from the resentment against the United States. This scenario will severely affect private sector investment plans, employment, and economic growth — not only in the United States but around the world. Far from "Making America Great Again" (MAGA), Trump is diminishing both his country and the world while violating every rule of international trade, both global ones under the WTO framework and those contained in free trade agreements like CAFTA-DR. This, of course, validates the concerns of those of us who argued that such treaties did not guarantee protected access to the U.S. market against political or geopolitical shifts. In international relations, the historical rule has been that decisions are not based on any moral or legal absolutes but rather on the exercise of power from unequal positions ("might is right"). This is why we always doubted that a free trade agreement with weaker countries would truly guide the behavior of the United States. But Trump's overwhelming violations of international law (surprisingly and disappointingly supported by more than half of his country’s political establishment) strip the United States of any moral authority to criticize countries that do not act according to the rules. This imposing attitude, reaffirmed by Trump when he paraphrases emperors and tyrants — enemies of any democratic principle — who claimed that "those who save their country violate no law," leads us to a world where anything is permitted for those who hold power. From the perspective of the definition of civilization, a world where anything goes loses its value. It takes us back to the law of the jungle — the rule of the strongest, of violence and war, or of peace imposed by one over others, not through harmony and goodwill. This is not a new “Washington Consensus”, now guided by the mercantilism typical of the 18th and 19th centuries, because in this case neither multilateral organizations like the World Bank or the International Monetary Fund nor other Western powers share Trump’s decisions. Far from consensus, today the most frequently heard word in those circles is “retaliation”. Latin America will be affected by the potential decline in global GDP growth, the tariffs imposed on our exports, and the rise in interest rates resulting from inflation that could be triggered by higher import taxes in the United States. However, the region could benefit from the U.S. confrontation with its developed-world allies by strengthening economic ties with Europe, China, Japan, India, and other powers of the Global South — without, of course, abandoning the U.S. market. To achieve this, our governments must stop meekly following Trump’s directives, such as preventing Huawei from competing to sell us 5G technology, participating in a shameful deportation policy that violates fundamental human rights, or undermining Panama’s absolute sovereignty over the Canal. What is needed is to build and implement a foreign policy with dignity, one that best serves the interests of each of our countries — not the whims of a single power.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском The Liberal Party led by Mark Carney has secured a fourth consecutive term in government. This victory has come at a time when Canada is facing an unprecedented threat to its economic security and sovereignty from United States President Donald Trump. In an election defined by concerns over Trump’s erratic tariff policy and talk of making Canada a 51st state, voters decided Carney was the leader best equipped to deal with these challenges. Carney previously served as governor of the Bank of Canada, where he guided the country through the 2008 global financial crisis. He later became the first non-British person to head the Bank of England, helping guide the United Kingdom through Brexit, one of the biggest shocks to the British economy in decades. Now the world is facing similar financial shocks from Trump’s trade war. The on-again, off-again nature of Trump’s tariff policy could inflict significant damage to the global economy — even more to the American economy — and cause irreparable damage to its reputation as a rational entity in international trade. In the face of the ill-advised and self-defeating U.S. tariffs, the new Canadian government should take prudent, urgent and bold steps to strengthen the nation’s economy. Here are major and important economic priorities for the government to reshape the economy and spur much-needed economic growth. Stabilize and strengthen the national economy As a primary act, the new government should stabilize the Canadian economy from the tariff shocks. It must continue to develop carefully calibrated retaliations to Trump’s tariffs. The revenue raised from the tariffs should be used to compensate those directly affected by them, using a multi-pronged mechanism that includes training, increased employment insurance benefits and additional transfers to low-income households to reduce the impact of tariffs on food costs. Currently, a series of provincial regulations restrict the goods and services that cross Canada’s provincial borders daily. The new government should urgently remove longstanding interprovincial trade barriers. According to a report by the Canadian Federation of Independent Business, removing these impediments could boost the economy by up to $200 billion annually. Similarly, a study by the International Monetary Fund indicates the effect of these barriers is equivalent to a 21 per cent tariff. Removing interprovincial trade barriers would significantly offset the negative effects of Trump’s tariffs on the Canadian economy, and provide a boost to the “Buy Canadian” movement. Carney seems to have made this a priority already, which is promising. In March, he said he aims to have “free trade by Canada Day” among provinces and territories. Streamlining natural resource projects Canada is a natural resource superpower. However, for natural resources and critical minerals to be extracted efficiently, regulatory processes need to be streamlined by cutting red tape and duplicative assessments. The federal government and the provinces should agree to a single environmental assessment that meets the standards of both jurisdictions. Additionally and importantly, respectful, genuine and meaningful consultations must be undertaken by project proponents and governments with the relevant Indigenous communities to address their concerns, respect their rights and safeguard their economic well-being in the development of the natural resources projects. Carney has said he will uphold the principle of free, prior and informed consent when it comes to initiating resource extraction projects and make it easier for Indigenous communities to become owners of said projects. A similar approach should also guide the construction of infrastructure projects such as pipelines and ports, which play a crucial role in facilitating Canada’s exports. Boost Canada’s productivity through innovation A country’s ability to raise living standards for its people mostly depends on its capacity to improve its productivity. Economist Paul Krugman once stated, “productivity is not everything, but, in the long run, it is almost everything.” Canada’s productivity is lagging, according to the Organization for Economic Co-operation and Development. The new Canadian government should take steps to boost the nation’s productivity by increasing direct expenditures on research and development. Additional funding should be allocated to higher institutions of learning, and incentivizing businesses to spend more on research and development through significant tax credits. Although research and development spending continues to grow in Canada, as a percentage to GDP, it is the second lowest among G7 nations. Boosting investments will drive innovation, spur economic growth and ensure Canada remains competitive on the global stage. Dealing with U.S. tariffs One of the government’s primary tasks will be preparing meticulously for trade negotiations with the U.S. to address the threat of tariffs and reach a “win-win” trade deal. Given Trump’s highly unpredictable nature, negotiations will not be easy. Although Trump could have withdrawn from the Canada-US-Mexico Agreement (CUSMA), he has not done so, and zero-tariffs remain in effect for products that are certified as being North American origin under the CUSMA rules. This could be a solid starting point for future trade negotiations. At the same time, Carney and his team must work to stabilize the Canadian economy against the unprecedented threat of Trump’s tariffs by strengthening the domestic economy, diversifying Canada’s exports and reducing the country’s dependence on the U.S. Pulling away from the world’s largest economy will not be easy for Canadian businesses, given the deep integration of Canada’s economy with that of the U.S. Still, expanding trade with the European Union, the U.K., Africa and the Association of Southeast Asian Nations — and exploring other opportunities to reducing trade barriers with nations in Asia, the Middle East and Latin America — will enlarge Canada’s export market. By doing all this, Canada can not only prepare for a tough round of U.S. trade talks but also position itself as a stronger, more self-reliant global trading partner.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском I. Introduction U.S. trade with China has significantly grown in recent decades and is crucial for both countries. Today, China is one of the largest export markets for U.S. goods and services (second to Mexico), and the United States is the top export market for China. As Figure 1 shows, this trade—much of which increased after China joined the World Trade Organization (WTO) in 2001—has brought lower prices to U.S. consumers and higher profits for American companies. But it also comes with costs, notably the loss of American jobs because of import competition, automation, and multinational companies moving manufacturing overseas.   Figure 1: US-China Trade over the 20 years Source: U.S. Bureau of Economic Analysis. After President Donald Trump began a so-called trade war with China in 2018, economic tensions between China and the U.S. have been on the rise. Chinese officials have warned that there are “no winners” in a trade war, but the second Trump administration embarked on a new and more aggressive tariff policy. In the first months of his second administration, Trump has threatened tariffs as high as 145 percent on all Chinese goods, while China’s latest retaliatory tariffs on U.S. imports are as high as 125 percent. The Trump administration claims the levies attempt to punish China for unfair trade practices, including Chinese subsidies that hurt U.S. workers and the long-standing accusation that China pressures American companies to hand over their technology and intellectual property, as well as China’s role in illicit fentanyl trafficking. Some economists doubt, however, that Trump’s aggressive approach will achieve its desired goals and raise concerns that tariffs will drive up inflation and the costs of goods, hurting American consumers and exports. This paper attempts to examine the economic effects of the U.S.-China trade war. It first shows the economic effects of the U.S.-China trade war under the first Trump administration and then forecasts for the second Trump administration. II. Trade War between the U.S. and China As Figure 2 shows, the US trade deficit with China has increased as trade between both countries expanded. Therefore, the first Trump administration started the trade war by imposing higher tariffs on Chinese goods. Figure 2: US-China Goods Trade (2001-2024) Figures 3-1, 3-2, and 4 show U.S. and Chinese tariff rates for each other’s goods. As Figure 3-1 shows, the US tariffs on Chinese goods were less than 5 per cent when the first Trump administration began on January 20, 2018. Then the tariff continued to rise. As Figure 3-2 shows, the average US tariffs on China goods were 20.8 percent when the second Trump administration began on January 20, 2025. As Figure 4 shows, after the second Trump administration took office, US tariffs of 10 percent were imposed on all imports from China under the International Emergency Economic Powers Act (IEEPA) on February 1, 2025. Then the Trump administration increased tariffs on Chinese goods to 20 percent on March 3 and to 34 percent on April 2. US tariffs of 10 percent were imposed on nearly all countries under IEEPA, but with some sector carve-outs on April 5. China retaliated against US tariffs by increasing tariffs on U.S. products to 34 percent on April 4 and to 84 percent on April 10. US tariffs ranging from 1 percent to 74 percent were imposed on nearly all countries with a trade surplus with the US, including China (74 percent). US tariff on Chinese goods included an additional 50 percent tariff as counter-retaliation for China’s retaliation announcement on April 10. Then again China faced an additional 41 percent tariff increase under IEEPA (to 125 percent total). However, Trump instituted a broad 90-day pause on steep Liberation Day tariffs, aiming to give time for negotiators to work out new deals. But Trump has not provided a pause for China. In response, China has raised its duties on imports of US goods to 125 percent from 84 percent on April 12, while US tariffs on Chinese imports have increased to 145 percent by adding a 20 percent tariff in relation to the fentanyl. Figure 3-1: US–China tariff rates toward each other and the rest of the world (ROW) before 2025 Source: MacroMicro. https://en.macromicro.me/charts/130548/china-us-tariff-rates  Figure 3-2: US–China tariff rates toward each other and rest of world, 2018-2025  Figure 4: US–China tariff rates toward each other in 2025 Source: Reuters, April 11, 2025. III. Economic Effects of the Trade War between the U.S. and China A.  The first Trump administration Chad Bowen (2023) at the Peterson Institute for International Economics raised a question “was the trade war between U.S. and China worth it for US exporters”? And his answer so far is no. In the middle of the trade war, the United States and China signed a historic trade agreement on a ‘Phase One trade deal’ on January 15, 2020. Bowen supposes that in 2018–21, US goods exports to China of phase one products had grown at the same pace as China’s imports of those products from the world and that US services exports to China had grown at the rate of US services exports to the world. Cumulative US goods and services exports to China in 2018–21 were about 19 percent lower with the trade war and phase one agreement between the two countries (see Figure 5). His estimates suggest that the United States would have avoided export losses of $24 billion (16 percent) in 2018 and $30 billion (20 percent) in 2019 resulting from the trade war. Exports would also have been $27 billion (18 percent) higher in 2020 and $40 billion (23 percent) higher in 2021 than under phase one agreement.   Figure 5: US exports to China would be higher with no trade war. i. US manufacturing exports suffered in the trade war and did not recover. As Figure 6 shows, China purchased only 59 percent of the full commitment of US manufactured products in 2020–21 under Phase One trade deal. Manufacturing was the most economically significant part of the trade deal, making up 44 percent of covered US exports in 2017. Autos and aircraft dominated US exports before the trade war. Both did poorly during the period of 2020–2021. US auto exports reached only 39 percent of the target over 2020–21. The sector’s suffering is a trade war warning. In July 2018, Trump’s tariffs on Chinese imports included auto parts; China’s tariff retaliation hit US car exports. US car exports decreased sharply in 2018, as car makers like Tesla and BMW reacted to the higher costs by moving production destined for the Chinese market out of the United States. (Ford, another major car exporter, including through its Lincoln brand, complained in 2018 that Trump’s separate steel and aluminum tariffs raised the cost of its US-based manufacturing by $1 billion.) Even when China lifted the retaliatory tariffs in early 2019, US exports did not recover. Sales of US aircraft, engines, and parts to China did even worse, reaching just 18 percent of the 2020–21 target. Though the industry was less directly impacted by trade war tariffs, US sales to China plummeted in 2019 after the two crashes of the Boeing 737 MAX. Between March 2019 and late 2020, the airplane model was grounded, with Boeing shutting down production in early 2020. China cancelled orders in April 2020, and though the legal text allows credit for aircraft “orders and deliveries”, additional orders had not been publicly announced by the end of 2021, despite complaints by the Biden administration that China's trade policy was holding back sales. (Exports of the 737 MAX might eventually resume, as Chinese regulators instructed airlines in December 2021 to implement the changes needed to allow the model to fly again in China.) Not all manufactured exports performed poorly during the period of 2020–21. Medical supplies needed to treat Covid-19 significantly increased. US exports of semiconductors and manufacturing equipment also boomed – thanks to a combination of stockpiling by Chinese companies as US export controls in 2019-20 threatened to cut off Chinese firms like SMIC and Huawei as well as increased demand for chips needed for consumer electronics and data servers brought on by the Covid-19 pandemic shift to remote work, schooling, and leisure.  Figure 6: US-China war battered hard US manufacturing exports to China ii.  US agricultural exports suffered in the trade war, received subsidies, and then recovered. To the Trump administration, agriculture was a very politically important part of the trade deal in 2020, despite accounting for only 14 percent of covered exports. As Figure 7-1 shows, when China's retaliatory tariffs hurt US farm exports during the period of 2018–19, the Trump administration awarded the sector tens of billions of dollars in federal subsidies. In the days leading up to the 2020 presidential election, the Trump administration released a report that touted resuming farm sales to China—ignoring the continued troubles facing US manufacturing, energy, and service exports. US farm exports did get back to 2017 pre-trade war levels and ultimately reached 83 percent of the 2020–21 commitment under Phase One deal (see Figure 7-1 & 7-2).  Figure 7-1: US agricultural exports to China Soybeans made up approximately 60 percent of US agricultural exports to China in 2017. As Figure 7-2 shows, exports of US soybeans to China were devastated by the trade war, falling from $12 billion to $3 billion in 2018, because China imposed retaliatory tariffs. Though soybean exports managed to reach their pre-trade war levels during the period of 2020–21, they still fell over 30 percent short of their target under Phase One deal. Products like pork, corn, wheat, and sorghum exceeded expectations, though not necessarily because of the trade deal in January 2020. The outbreak of African swine fever led China to increase pork imports from the U.S. in 2019 before the deal was agreed. (In 2020–21, China's pigmeat imports from the rest of the world also averaged five times 2017 levels.) Wheat and corn imports increased after China began to comply with a 2019 WTO dispute settlement ruling against its unfilled tariff rate quotas. (Compared with 2017, China's imports from the rest of the world in 2020–21 were about 200 percent higher for wheat and 350 percent higher for corn.) Some farm exports also benefitted less from the Chinese purchase commitments under the trade deal in January 2020. Seafood and farm products did not rebound from the effects of the trade war. After being hit with Chinese tariffs, US lobster exports re-achieved about half of their target in 2020–21. US exports of raw hides and skins ended up at less than one-third (see Figure 7-2).  Figure 7-2: US agricultural exports to China (sub-category) iii. U.S. Imports from China: Total US imports from China were down with the beginning of the trade war. For 15 months beginning in July 2018, the Trump administration imposed higher tariffs on Chinese products. The Trump administration began the trade war by imposing tariffs of 25 percent on products covering roughly $34 billion of US imports from China in July 2018 (List 1) and on $16 billion of imports in August (List 2). When China retaliated against the U.S., the trade war continued with Trump imposing 10 percent tariffs on an additional $200 billion of imports in September 2018 (List 3), increasing the tariff rate of those duties to 25 percent in June 2019. In September 2019, Trump hit another $102 billion of imports (List 4A) with 15 percent tariffs, later reducing them to 7.5 percent upon implementation of the US-China Phase One trade agreement in February 2020. (The administration identified another set of products covering most of the rest of US imports from China of more than $160 billion—List 4B—for which it scheduled tariffs to take effect on December 15, 2019 but was cancelled on December 13, 2019.) As a result, as Figure 8-1 & 8-2 show, overall, the trade war reduced US imports from China. Then US imports recovered only slowly, starting in mid-2020. In January 2022, when the term of the first Trump administration ended, US imports from China (red line) remained well below the pre-trade war trend (dashed line), while US imports from the rest of the world (blue line) returned to pre-trade war levels of June 2018. China was the source of only 18 percent of total US goods imports in 2022, down from 22 percent at the beginning of the trade war.  Figure 8-1: Value of US goods imports from China and the rest of the world, 2016–2022 (June 2018 = 100)  Figure 8-2: Value of US imports from China and the rest of the world by trade war tariff list, 2018–2022 (June 2018 = 100) B.  The second Trump administration As of April 12, 2025, U.S. tariffs on Chinese goods are 145 percent, but this tariff rate is not sustainable over a long period of time because it is way too high and because U.S. President Donald Trump and Chinese leader Xi Jinping want to negotiate. In fact, Trump signalled on April 23 that he would cut his 145 percent tariff on Chinese goods substantially. Therefore, it is not reasonable to explore the effects of Trump’s tariffs of 145 percent. Last year, McKibbin, Hogan, and Noland at the Peterson Institute for International Economics (PIIE) examined the impact of now-President Trump’s proposed tariffs based on Trump’s campaign promises that would impose 60 percent additional tariffs on imports from China. They explored the impacts of a 60 percent additional tariff on China with and without other countries’ retaliating in kind by imposing steeper tariffs on imports from the United States. Figures 9 through 14 show the results from their analyses. Figure 9 shows that China experiences the most significant GDP losses (0.9% below baseline by 2026), while the U.S. also experiences a negative GDP growth rate (0.2% below baseline by 2027).  Figure 9: Projected change in real GDP of selected economies from an additional 60 percent increase in US tariffs on imports of goods from China, 2025-40 Figure 10 shows that the direct impact of the U.S. tariff of 60 percent on Chinese employment is initially negative (-2.25% in 2025), but a gradual decline in Chinese real wages eventually restores employment to the baseline after a decade. US employment will fall 0.23% below baseline by 2027.  Figure 10: Projected change in employment (hours worked) in selected economies from an additional 60 percent increase in US tariffs on imports of goods from China, 2025-40 Figure 11 shows that US inflation rises by 0.4% in 2025, with the higher cost of imports due to tariffs not offset by the stronger US dollar lowering prices of imports from other countries. The tariffs on US imports from China are mildly deflationary in other countries (see Figure 11).  Figure 11: Projected change in inflation in selected economies from an additional 60 percent increase in US tariffs on imports of goods from China, 2025-40 The slowdown in the Chinese economy causes capital to flow out of China and into other economies. This is initially a financial capital flow responding to a fall in financial rates of return in China and a rise in expected profits in countries like Canada and Mexico. That financial inflow becomes physical investment over time, which increases production capacity in these economies. Countries that receive the capital experience a trade deficit (see figure 12). This additional production enables the rise in exports to the US economy. While the US trade deficit with China shrinks, the overall US trade deficit increases (figure 12) as the partial relocation of production back into the US economy causes the dollar to appreciate.  Figure 12: Projected change in the trade balance of selected economies from an additional 60 percent increase in US tariffs on imports of goods from China, 2025-40 So far, figures have focused on the unilateral imposition of US tariffs on Chinese products. In figure 13, McKibbin, Hogan, and Noland compare projected changes in US GDP from the unilateral imposition of tariffs with a scenario where China retaliates by imposing a 60% tariff on US goods and services. By 2026, US GDP losses from Trump’s tariff policy more than double if China retaliates against the US (see Figure 13). The impact on US inflation in 2025 yields a similar result (see Figure 14). With Chinese retaliation, US inflation rises 0.7% above baseline compared with 0.4% without retaliation.  Figure 13: Projected change in US GDP from an additional 60 percent increase in US tariffs on imports of goods from China, with and without retaliation by China, 2025-40  Figure 14: Projected change in US inflation from an additional 60 percent increase in US tariffs on imports of goods from China, with and without retaliation by China, 2025-40 IV. Conclusion This paper showed that U.S. tariffs on Chinese goods imposed by the first Trump administration mainly had negative impacts on U.S. exports, although they reduced U.S. imports from China over a short period of time. The analysis by McKibbin, Hogan, Noland (2024) for the second Trump administration also shows that U.S. tariffs on Chinese goods will have negative impacts on US GDP, inflation, employment, and trade balance. This paper also showed that U.S. tariffs on Chinese goods will have larger negative impacts on U.S. GDP and inflation if China retaliates. Then a question arises: “Why does Trump attempt to impose extremely high tariffs on products from China?” Larisa Kapustina,  Ľudmila Lipková, Yakov Silin and Andrei Drevalev (2020) identify four main reasons that led the U.S. to the greatest trade war between the U.S. and China: a) to reduce the U.S. deficit of bilateral trade and increase the number of U.S. jobs; b) to limit access of Chinese companies to American technologies and prevent digital modernisation of the industry in China; c) to prevent the growth of China’s military strength; and d) to reduce the U.S. federal budget deficit. References Bown, Chad, “China bought none of the extra $200 billion of US exports in Trump's trade deal.” Peterson Institute for International Economics, Working Paper. July 19, 2022.Bown, Chad, “Four years into the trade war, are the US and China decoupling?” Peterson Institute for International Economics, Working Paper. October 20, 2022.Bown, Chad, “US imports from China are both decoupling and reaching new highs. Here's how.” Peterson Institute for International Economics, Working Paper. March 31, 2023. Kapustina, Larisa, Ľudmila Lipková, Yakov Silin and Andrei Drevalev, “US-China Trade War: Causes and Consequences.” SHS Web Conference. Volume 73, 2020: 1-13.McKibbin, W., M. Hogan and M. Noland (2024), “The International Economic Implications of a Second Trump Presidency.” Peterson Institute for International Economics, Working Paper 24-20.