AISEEKER

When Donald Trump enters the White House for a second term, his policy agenda is likely to be as aggressive as ever. While many media outlets speculate whether the U.S. will impose additional tariffs on China, it’s worth considering a different approach: lowering tariffs might serve America’s interests better.

Historically, after Trump’s election in November 2016, the U.S. dollar weakened. Following a year of domestic stabilization, the U.S. announced $50 billion in tariffs on China on March 22, 2018—one year and three months into his term. This move caused the yuan to devalue rapidly, falling from 6.22 to 6.98. Later that year, in December 2018, when the U.S. agreed not to impose further tariffs on China, the yuan rebounded to 6.6. These historical shifts demonstrate that tariffs are second only to interest rates in their influence on exchange rates.

Fast forward eight years, and the global landscape has shifted dramatically. Key developments include the rise of right-wing populism, Europe’s economic struggles, Russia’s resource drain, global trade dependency on China, and the resurgence of industries like technology and electric vehicles. Additionally, the U.S. faces a softening economic cycle. In this context, lowering tariffs might be the smarter move.

Instead of imposing higher tariffs on China, the U.S. could consider reducing tariffs, or alternatively, raising tariffs by 50% on other countries trading with China, while imposing only a modest 20% tariff on China itself. The rationale is clear: China remains the U.S.’s largest supply chain partner. Regardless of alternative markets like Mexico, much of the final production still relies on China. Through exports, China accumulates vast amounts of U.S. dollars, which are reinvested in U.S. markets or stored as U.S. Treasury reserves.

From the perspective of the “siphoning effect,” high tariffs incentivize low-tariff countries to profit through transshipment, as they remain reliant on China’s supply chain. However, reversing this dynamic by reducing tariffs on China could lead these low-tariff nations to resent China’s market dominance, potentially fueling anti-China sentiment. A recent parallel is Huawei, which was forced to innovate its own system under pressure, ultimately strengthening its independence. Similarly, Russia’s decision to impose a 50% tariff on Chinese vehicles and temporarily suspend some Chinese goods reflects this siphoning effect.

China’s strength lies in its low-cost goods and labor, which underpin its mature industrial chains. Meanwhile, America’s key leverage remains its monetary system. If the yuan were to appreciate, it could drive significant investment into the U.S., while undermining China’s competitiveness in industries like electric vehicles, particularly in Europe. This would further influence the development of the Eurasian region, where the U.S. dollar system plays a critical role in suppressing regional integration. Additionally, a stronger yuan and lower tariffs could encourage manufacturing supply chains to return to the U.S., rebuilding America’s industrial base.

Most importantly, commodity-related shocks in financial markets are temporary capital flows, not structural shifts. For the U.S. to truly challenge China, the core strategy must be to alter supply-demand dynamics. The most effective way to achieve this is by forcing the yuan to appreciate, reminiscent of Japan’s experience with the Plaza Accord.

However, to execute this strategy, the U.S. must offer something in exchange. What could it be?

• The European market? Unlikely, as restricting Europe would disrupt U.S. capital flows.

• Taiwan? Impossible, given its strategic importance.

• AI technologies? Not realistic, as it’s America’s core competitive advantage.

The only viable option is to open the U.S. market to China—offering preferential tariffs, allowing Chinese capital into U.S. industries, and granting China greater international status. Such a strategy would not only alter the trade structure but also use yuan appreciation to enhance the U.S. economy’s attractiveness, disrupting Chinese manufacturing and supply chains in the long term.

As U.S. Treasury Secretary Best once remarked, “Tariffs are merely a negotiating tool.” Instead of clinging to outdated tactics like high tariffs, the U.S. might achieve greater leverage by recalibrating its tariff and monetary policies to weaken China’s currency system and disrupt Asian supply chain dynamics. This would position the U.S. as the dominant force at the negotiation table.