How U.S. Tariffs on Allies Undermine Economic Statecraft

Photo: GEOFF ROBINS/AFP/Getty Images
There is no shortage of well-reasoned, -researched, and -written pieces spelling out how misguided the Trump administration’s threatened but ultimately delayed application of tariffs on Canada and Mexico, as well as its imposed tariffs on China are. They will be economically costly, raise prices for consumers and producers, and lower growth. If the past is prologue, any revenue earned will be offset by bailouts to industries harmed by retaliation. What’s more, these tariffs and bailouts will distort economic activity, push firms toward less productive activities, and make it harder to compete with the People’s Republic of China (PRC) in the industries of tomorrow, as was spelled out just yesterday in a separate CSIS commentary.
Instead of adding another 1,200 words to this choir, I would like to focus instead on the use of economic statecraft itself and how this episode dramatically deteriorates the ability of the United States to use economic tools to protect the security of its citizens going forward.
The president is using authorities granted to him by the International Emergency Economic Powers Act (IEEPA); a law passed in 1977, granting him broad authority to regulate commerce in response to “unusual and extraordinary threats” to national or economic originating from outside of the United States. IEEPA arguably provides the president with the most sweeping unilateral and unchecked authorities to impose economically coercive statecraft to pursue the United States’ foreign policy objectives. This begs the question: How does this episode impact the United States’ ability to protect its economic and national security with tools like IEEPA?
Let’s start with a straightforward and hopefully inarguable assertion: to shape the behavior of others through economic means, the United States must be able to provide inducements to incentivize cooperation and be able to apply coercive leverage while deterring or denying the ability of other states to do the same. Acquiring and maintaining these abilities requires a commitment to policies that promote a strong economy, connected to all other economies, directly or indirectly, and the credibility of the economic and political system that these tools can and will be wielded in the service of the aims of the state, which are well known by all.
President Trump’s proposed use of IEEPA to impose tariffs on Mexico and Canada is deleterious to every requirement for an effective economic statecraft policy.
Like Antibiotics, Economic Coercion Builds Resistance
There is no mistaking that the United States, as the world’s largest economy and a central hub for innovation, finance, and commerce, can both provide immense value to its partners and impose significant costs. The United States has never been shy about using coercive leverage but has historically done so in defense of international law and human rights. What this use of IEEPA signals is that the future of U.S. economic coercion will come at a high cost. Coercive economic measures are like antibiotics: They are highly effective in targeting specific threats but when overused can lead to diminishing returns. Just as bacteria develop resistance to antibiotics, countries subject to repeated sanctions will develop immunity by diminishing their exposure to the U.S. market.
It’s clear that the Trump administration is concerned about exactly this type of “bacterial resistance” because it threatened tariffs on any country that attempted to develop an alternative payment system to the dollar. While this threat was likely noted by partners, so too was President Trump’s threat to use secondary financial sanctions on Colombia over a minor diplomatic disagreement. The overuse of sanctions or other coercive tools will lead allies and adversaries alike to question the reliability of the United States as a partner, prompting them to seek alternatives. Only two weeks into the administration, the United States has significantly deteriorated its global economic influence, and efficacy of IEEPA, by prioritizing its short-term strategic goals over the long-term health and stability of the global economic system.
Coercing Friends Increases Vulnerability to Rivals
For tools like IEEPA to be a credible threat, state and non-state actors must believe that they will be used against them. This in turn requires that the United States can credibly deter or deny the use of similar tools against the U.S. economy or that would otherwise neutralize the threat of U.S. economic statecraft tools. It is a bipartisan consensus that the PRC has a myriad of economic tools that could significantly harm the United States. The last three administrations have expended significant diplomatic and financial resources to de-risk the U.S. economy to mitigate these vulnerabilities. The use of IEEPA to impose higher trade restrictions on Canada and Mexico than the PRC undercuts all these efforts.
The PRC has a stranglehold on critical mineral processing and is increasing its access to mining assets around the world. Both Mexico and Canada are home to significant reserves of critical minerals, and the United States currently imports $47 billion in minerals from Canada. This use of IEEPA not only makes those current imports more expensive but also reduces the incentive of investors to diversify away from PRC sources, harming U.S. economic resilience to coercion by the PRC.
Creditably: Hard Won and Easily Lost
This misuse of IEEPA will not only build resistance to U.S. coercive tools and make the U.S. economy more vulnerable to economic coercion, but it will also significantly harm U.S. credibility abroad, which is arguably even more damaging to U.S. economic statecraft tools.
Credibility is essential for the United States when wielding its economic leverage. Maintaining credibility means the United States must honor its commitments, whether in trade agreements, security pacts, or international accords. Other states must believe that the United States has both the capacity and political will to judiciously impose sanctions, trade restrictions, or other economic measures in accordance with the rule of law and international norms. If the United States exercises its economic statecraft toolkit capriciously and proves itself to be an unreliable and unpredictable partner, it will not only lose the support of its allies, but it will also diminish the effectiveness of those very tools it recklessly wields.
Copying a Losing Playbook
The administration’s use of IEEPA will increase uncertainty among adversaries and allies alike about the future use of U.S. economic coercion tools, reducing the deterrent effect, encouraging workarounds, and weakening the toolkit’s overall impact, making future threats or actions less effective.
I am sure of this because I have seen it before. In addition to being a trained economist, I also had the privilege to serve my country as a diplomat, spending years assisting countries in responding to economic coercion. In that role, I met with dozens of countries all concerned with how to weather this weaponization of commerce. Some stood tall, others capitulated to their aggressors, but it all changed the way they interacted with the bully. The same will be true of those at the receiving end of U.S. bullying.
Based on my experience, I can say with high confidence that this episode dramatically deteriorates the ability of the United States to use economic tools to protect the security of its citizens going forward.
Philip Luck is the director of the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.