Beneath the bluster, the U.S. is losing the trade war

John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.

“You should see the other guy.” That’s how you can summarize U.S. President Donald Trump’s trade war with the world half a year into his second presidency: He’s hurting other countries, but at considerable cost to his own.

Coverage of his trade talks has so far been conducted as if they were pugilistic battles, with journalists trying to determine who “won” each fight. Mr. Trump’s repeated humiliations of trading partners, most notably the Europeans, imposing big tariffs on them while they cut their own on U.S. imports, are thus conveyed – sometimes literally – as Hulkamania smackdowns.

It’s a funny way to assess damage, though. The more pertinent question is: Is the trade war restoring the health of the U.S. economy and bringing manufacturing jobs back home, as Mr. Trump said it would do?

The answer is no. This week’s U.S. gross domestic product report showed that while U.S. growth rebounded from its first-quarter decline, it was merely due to a cyclical rebalancing of trade. So far this year, the economy has grown at an annualized rate of just over 1 per cent, a marked slowdown from the 2.8 per cent of the Biden administration’s final six months.

Opinion: Why the damage to Canada from Trump’s tariffs has been small (so far)

Trump signs executive order imposing new tariffs on a number of trading partners

And it gets worse. Digging into the report’s entrails, consumption growth is decelerating to a pace that would keep the U.S. economy barely expanding for the remainder of 2025. Worse still, investment fell, putting in doubt Mr. Trump’s claim that tariffs and his ‘One Big, Beautiful Bill’ would supercharge corporate spending. And perhaps worst of all, exports actually weakened, suggesting that the response of trading partners faced with U.S. barriers is to look elsewhere for business.

Moreover, all of this has happened before Mr. Trump’s tariffs really begin to bite. New research shows that the already-modest share of the tariffs being absorbed by exporters has dropped to nearly nothing. So, when he boasts that other countries are going to pay higher tariffs than the United States, what he’s really saying is that Americans will now be taxed more heavily than their trading partners.

This will soon begin to show up either in price rises and thus reduced consumption, or lower profits and thus reduced investment. Either way, the U.S. faces a substantial further drag on its already slowing growth.

Most significant of all, perhaps, is that while Mr. Trump said he would bolster the U.S. position vis-a-vis China, he’s doing the opposite. In the second quarter, China’s economy grew faster than expected, at an annual rate of 5.2 per cent. Remarkably, given the turmoil, and unlike the American experience, the country’s exports also rose.

That’s because China responded to Mr. Trump’s tariffs not by trying to mollify him to preserve access to the U.S. market, as the British and Europeans did, but by diversifying trade elsewhere. The country’s shipments to the U.S. fell by a quarter, but trade with other regions – in particular Southeast Asia, Africa, Latin America and even China’s fierce rival, India – grew strongly.

Meanwhile, China is taking advantage of the U.S.’s withdrawal from the world, manifest in the closure of USAID and severe cutbacks at the State Department, to step into the breach. In contrast to Mr. Trump’s protectionism, it has eliminated tariffs on imports from Africa, which is enabling it to become the most significant partner for much of this fast-growing continent. Similarly, its Belt and Road Initiative is moving forward aggressively, with more than US$124-billion invested in developing countries in the first six months of the year alone.

Opinion: Is China a better trading partner than Trump’s America?

The flaw in Mr. Trump’s trade strategy is that there, in fact, appears to be no strategy at all. Instead, he’s seemingly guided by the logic of a playground bully – picking fights he knows he can win and avoiding anyone who stands their ground.

Thus, America’s closest friends, such as Europe and Japan, having dropped their defences, get pushed around, while China stands firm and invites others to its side. Unsurprisingly, therefore, in his negotiations with Beijing, Mr. Trump appears to be doing all the blinking, having lifted the ban on chip sales to China though apparently securing nothing in return.

In fact, trading partners such as Europe and Japan will probably treat their “surrenders” as tactical retreats. They, too, are looking to diversify away from the U.S. Their agreements with Mr. Trump contain glowing promises to invest and buy American, but hardly anyone believes those pledges are worth the paper they’re printed on. In most cases, there isn’t even a piece of paper to begin with.

Still, it would be a mistake to say China is winning this trade war. The truth is nobody is coming out ahead. All countries that trade with the world economy, which is pretty well all countries, are suffering. China itself has structural weaknesses, such as weak consumption and excess capacity in manufacturing, that will likely restrain its growth later this year.

But one thing is clear: The U.S. is turning out to be a big loser.