By Hema Senanayake –
Dr. Hema Senanayake
President Trump’s 90-day reciprocal tariff pause will end in a couple of days, exactly on July 09th. It is sure that the new tariff regime is going to prevail for many countries even though the percentage of tariff imposed could be relaxed a little bit. Treasury Secretary Scott Bessent said he expects the U.S. government to collect $2.8 trillion in tariff revenue over the next ten years. This will begin from the Trump’s budget for 2025, which is known as “Big, Beautiful Bill”, yet the Congressional Budget Office (CBO) is not so optimistic about the tariff outcome when” scoring” or existing rules are considered to measure the financial impact of the “Big, Beautiful Bill.”
Mercantilist governments imposed high tariffs on imports, subsidized exports, and tightly regulated commerce in the belief that economic strength translated directly into national power. Classical mercantilism, which shaped European economic policy from the 16th to the 18th century, was grounded in the belief that a nation’s wealth was best measured by its stock of gold and silver, accumulated through a positive balance of trade. Adma Smith, the father of modern economics, criticized the mercantile system by advocating for free international trade and competition ensuring optimum economic efficiency.
After World War II, the United States led the world in promoting a liberal international order based on free trade, open markets, and multilateral institutions like the International Monetary Fund, the World Bank and World Trade Organization (WTO). This model assumed that trade liberalization would yield mutual benefits and foster global economic stability and economic growth, pulling millions and millions of people out of poverty. However, beginning with the Trump administration and continuing under President Biden—albeit in a different form introducing Artificial Intelligence into production —the U.S. policy has undergone a profound shift.
With the said policy shift, in the second decade of 21st century, the United States—once the most ardent champion of free trade and globalization—has begun to show strong signs of a return to mercantilist principles. While this shift does not represent a revival of classical mercantilism in its historical form, the country is embracing a modern version of it often referred to as neo-mercantilism. This transformation reflects a strategic rethinking of the role of trade, industry, technology and the state in securing national prosperity and power.
The most visible sign of this change was the introduction of aggressive tariffs under President Donald Trump. These tariffs, particularly against China, but also targeting traditional allies in the European Union, Canada, Australia, South Korea and Mexico, were justified as efforts to protect American industries, reduce trade deficits, and bring manufacturing jobs back to the United States.
President Joe Biden, while differing in rhetoric, has had begun and deepened some of these policies through major legislative packages. The CHIPS and Science Act (2023), the Inflation Reduction Act, and the Bipartisan Infrastructure Law all represent a strategic reorientation toward domestic industrial policy. These laws pour billions into semiconductor manufacturing, clean energy production, and infrastructure, with funding often contingent upon the use of upskilled American labor and materials. The goal is not only to stimulate economic growth but to secure control over critical technologies and supply chains like the production of advanced semiconductors which are required especially in defense manufacturing . The U.S. thinks the dependence of such products on geopolitical rivals poses for national security risk.
In addition to these concerns, the U.S. politicians observed that near exponential growth of public debt exceeding over 120% of GDP could pose a severe economic risk in the near future. They wanted to have a balanced budget. That is why the Treasury Secretary Scott Bessent insists that actually tariff revenue puts the Big Beautifull Bill in surplus if you include the tariff revenue.
While appreciating these concerns of the United States, the choice of method in rectifying the severe growth of public debt to GDP is totally wrong and threatens the stability of global order of international trade.
It is true that the U.S. has a huge trade deficit amounting to $1.2 trillion for the year 2024. However, as the U.S. often earns more on its overseas investments due to U.S. investors owning higher-yielding equity and direct investments abroad, the current account deficit was much lower, standing at 303.9 billion dollars (FRED data) in 2024.
Additionally, the U.S. benefits from global trust in its legal system, political stability (relatively), and regulatory transparency. This trust reinforces demand for U.S. financial assets and Investors from around the globe view U.S. assets as safe and profitable, especially during times of global uncertainty (the U.S. benefits from a “flight to safety”). This allows the U.S. to attract massive foreign investments. All these means that there is no balance of payment problem in the U.S. Therefore, the selection of the criterion of trade deficit to impose tariff is theoretically wrong. Practically it is not wise, and this is shown by the rollercoaster movement of stocks in Wall Street recently. Trust is the greatest intangible asset that the U.S. benefits enormously, but ad hoc measures in regard to tariff can ruin it.
Another erroneous concept hoovering around the world is that the elimination of trade deficit could help to reduce government debt resulting in lower taxes. Evidence shows that some countries experience heavy government debt while recording heavy trade surpluses. For example, Japan has been posting a trade surplus for decades but the government debt to GDP is 235% while the U.S.’s government debt to GDP is 120%. Singapore has the same problem – positive trade surplus with having higher government debt to GDP ratio. Government debt relates to public spending vs. tax revenue, not trade balances.
But the U.S. needs a solution for severe accumulation of public debt. Definitely, it cannot be found out in increasing tariffs. If the U.S. face no balance of payment problem as it can borrow on its own currency and to that extend the U.S. doesn’t need a wall of tariffs because American Power was built on openness and trust. However, tariff is consumption money as such the U.S. can impose universal, non-discriminative tariff on all finished goods, say 10 to 15%. This should be done as it could be an easy point of tax collection. This will build confidence and remove chaos paving the way for next American industrial revolution in increasing productivity based on Artificial Intelligence and Internet technology. Partly, this was the strategy of Biden administration.
However, no country can afford to maintain protectionist tariff policies and subsidies indefinitely. And given the lack of consumer demand without subsidies artificially lowering costs, these investments will likely collapse sooner if technologists do not look at alternative advance technologies that can increase productivity, lowering the cost of production. Envisioning a second round of free international trade abide by rules could take place in a more peaceful world under a more rational global financial architecture. Ultimately, the success of American reindustrialization will depend on continued collaboration between the public and private sector based on commitment to invention, innovation and improvement of productivity via advanced technology and upskilling American labor force, definitely not through imposing high tariff.
Let us wait and see how Trump’s 90-day tariff pause unravel on July 09th.
