An Alternative Tariff Strategy for the Trump Administration

President Donald Trump’s trade policy has emerged as a focal point of public debate. The early months of his second term have been marked by a flurry of tariff announcements, exemptions, and temporary suspensions. Among the most consequential developments was the imposition of so-called reciprocal tariffs on April 2 (which President Trump called Liberation Day). Those measures, aimed at the United States’ largest trading partners, triggered a sharp global market downturn, provoked threats and implementation of retaliatory tariffs from other nations, and raised concerns over rising inflation and a potential recession. 

Following a wave of public and market backlash, President Trump temporarily suspended his reciprocal tariff policy until July 9. Two days before this deadline, he issued an executive order extending the deadline until August 1, while announcing a broad range of tariff rates countries would face in the absence of new trade agreements.  

Over the last three months, the Trump administration has focused on securing trade agreements with all fifty-seven countries targeted by the reciprocal tariff policy. However, despite the threats of large-scale import tariffs, the administration has only negotiated trade agreements with Japan, China, Philippines, Indonesia, Vietnam, and the United Kingdom. All six agreements are limited in scope and offer modest concessions, underscoring the complexities and challenges of international trade negotiations. 

The effects of those tariffs are already starting to show in economic data. The Federal Reserve recently updated its forecasts for the U.S. economy, projecting higher inflation and lower growth rates due to increased uncertainty surrounding trade policy and geopolitics.   

While the Trump administration has just extended its deadline, it remains improbable that the United States can negotiate comprehensive trade agreements with the remaining fifty-one countries in the coming months. Meanwhile, the higher costs stemming from those tariffs are beginning to affect many Americans. In May, Walmart, the nation’s largest retailer, announced it would raise prices due to increased expenses stemming from the tariffs. 

The core problem with President Trump’s tariff strategy has been its lack of focus and coherence. Throughout his campaign and the early months of his second term, he outlined three primary goals: increasing federal revenue (referencing the “External Revenue Service” in his inauguration address), reducing trade deficits and reindustrializing the U.S. economy, and eliminating unfair trade barriers abroad. Taken individually, each of those objectives has the potential to garner bipartisan support. Historically, many presidents have pursued similar aims. Even former President Joe Biden, despite efforts to reverse many of Trump’s first-term policies, maintained several tariffs on China and advanced legislation to protect strategic U.S. industries. 

However, rather than tailoring specific tariff policies to address each objective, the Trump administration has opted for a broad, one-size-fits-all approach. This blunt strategy has created confusion, raised costs for American businesses and consumers, and introduced counterproductive incentives. As the pause on reciprocal tariffs nears its end and the administration is confronted with the complexities of trade negotiations, a more targeted and strategic alternative—one that aligns with the administration’s goals, minimizes domestic economic harm, and offers greater clarity and predictability to U.S. allies—should be undertaken. 

Generating Revenue 

As many economists have observed, import tariffs are typically paid by domestic importers, who then pass those costs on to consumers. This dynamic is evident in Walmart’s announcement of price increases. A blanket 10 percent tariff risks fueling inflation and placing a heavier financial burden on American households. 

To mitigate this impact, the Trump administration should apply the principle of price elasticity. When demand is elastic, small price changes can significantly affect consumption. However, many essential goods are inelastic—meaning consumers have little choice but to absorb higher prices. In those cases, companies can pass tariff costs directly to consumers. To avoid exacerbating inflation and disproportionately affecting working-class families, inelastic goods (such as basic household necessities and products like coffee or prescription drugs) should be exempt from broad tariff measures. 

Moreover, whether a domestic firm absorbs or shifts the cost of a tariff often depends on its bargaining power relative to foreign exporters. If U.S. importers have leverage and access to alternative suppliers, they could compel exporters to lower prices, effectively shifting the tariff burden abroad. By targeting sectors where this dynamic is favorable (such as the European automobile sector), the administration can raise revenue with minimal harm to U.S. businesses and consumers. 

Finally, given the size and influence of the U.S. economy, a more modest baseline tariff—say between 3 and 5 percent—could be more sustainable. In some cases, currency adjustments can help offset the effects of smaller tariffs, reducing their inflationary impact. 

Reindustrialization 

Protecting critical domestic industries—especially those vital to national security—and restoring high-paying manufacturing jobs have broad bipartisan support. A notable example is the CHIPS Act, passed with bipartisan support during the Biden administration, which aims to boost domestic semiconductor production, among other goals. However, the blanket tariffs imposed by President Trump on Liberation Day targeted all major trading partners and a wide range of goods, including low-cost consumer products that are unlikely to be manufactured domestically again.  

This approach lacks strategic focus. Instead, the Trump administration should adopt a targeted strategy that supports the reindustrialization of high-value manufacturing sectors and safeguards critical industries. The first step is to clearly identify which industries require rebuilding or protection. The U.S. automotive sector is one example that already enjoys strong bipartisan consensus, particularly from an influx of inexpensive Chinese electric vehicles that benefit from heavy state subsidies. Other critical sectors, for example, include semiconductors, pharmaceuticals, and advanced machinery. Once those sectors are identified, the Trump administration should implement targeted tariffs designed to encourage foreign companies to relocate production to the United States.  

To be effective, this strategy needs to offer long-term policy certainty instead of short-term measures that risk reversal within weeks. A phased approach could begin with modest tariffs, gradually increasing each year until reaching a predetermined cap in the high double digits. This approach would give companies time to adjust supply chains and invest in U.S.-based manufacturing. Ideally, this policy framework would be codified into law by Congress to provide maximum clarity and predictability for the business community. 

Overseas Trade Barriers  

Traditionally, the United States maintains some of the lowest import tariffs globally. Even the European Union—widely regarded as a proponent of free trade—often imposes higher tariffs. For example, the European Union levies a 10 percent tariff on imported cars, while the United States traditionally imposed only 2.5 percent, except for pickup trucks, which face a 25 percent tariff. In contrast, many developing and emerging economies maintain high tariffs to shield domestic industries. Given this context, reassessing trade relationships with major U.S. partners is a reasonable policy move. With the threat of escalating trade tensions, many countries are already open to renegotiating trade agreements. As a result, the Trump administration may not need to reimpose tariffs immediately after the August 1 deadline to achieve its objectives. 

When negotiating new trade deals, the Trump administration should recognize that most countries have sensitive sectors—often protected for reasons of national security, cultural identity, or domestic political pressure. Agriculture, in particular, is frequently a flashpoint. For instance, Japan imposes tariffs exceeding 200 percent on imported rice beyond a limited duty-free quota. In the European Union, Polish farmers have recently protested against Ukrainian grain imports, and the Mercosur-EU trade agreement is facing political resistance from European farmers concerned about unfair competition. 

If major trading partners prove unwilling to engage in meaningful negotiations, the Trump administration could consider imposing targeted import tariffs as a form of political leverage. This tactic has precedent. During Trump’s first term, the European Union responded to U.S. tariffs with retaliatory measures that strategically targeted goods from politically sensitive regions—such as bourbon from Kentucky, the home state of then-Senate Majority Leader Mitch McConnell, and Harley-Davidson motorcycles, a symbol of American manufacturing. Those tariffs were designed to exert political pressure on U.S. leadership while minimizing the impact on EU citizens. 

A More Strategic Path to Economic Security and Competition 

Although all these proposals will inevitably influence the U.S. relationship with China, engagement with Beijing is uniquely complex. As the United States’ primary geopolitical rival, China presents challenges that go beyond trade imbalances. A more comprehensive, long-term dialogue is needed to define the nature of the U.S.-China relationship—particularly regarding fair trading practices and the degree of economic interdependence between the two nations. 

The extension of the ninety-day pause on the Liberation Day tariffs has given the Trump administration a brief window to recalibrate. However, meaningful trade negotiations are time-consuming and unlikely to be concluded with all targeted countries within such a short timeframe. The administration should first clarify its distinct trade objectives and then use tariff policy strategically to advance those goals, rather than relying on broad or reactive measures. 

This work represents the views and opinions solely of the authors. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy.