How Trade Chaos Could Transform Into the Trump Round of Trade Negotiations

Chaos theory posits that random and unpredictable movements will, over time, begin to display underlying patterns determined by “strange attractors,” which follow the laws of physics and control the behavior of the chaotic system. Knowing the nature of the attractors helps to predict outcomes, such as weather forecasting. Any small change in the initial conditions that gave rise to the chaos can result in large differences in outcome, the so-called butterfly effect.

By any reasonable measure, the Donald Trump administration’s tariff policy has been chaotic. Tariffs are on-again, off-again, higher, lower, and intended to address everything from eliminating the trade deficit to reshoring manufacturing, raising revenue, reducing foreign barriers to U.S. exports, and addressing perceived emergencies. On April 12, the administration pledged to have ninety trade deals in ninety days. This chaotic approach poses a distinct policy question: Could the practical realities of dealing with many countries on many products be the strange attractors of trade negotiations and bring more order and predictability to the process?

The answer will depend in part on what kind of deals the administration hopes to achieve; that is, transactional or market and rule based. Transactional deals entail commitments to import more of a particular product from the United States, to invest in the United States, or to share technology. This was the essence of the first Trump administration’s deal with China. Predictably, the specified quantities were not shipped.

Conversely, market- or rule-based deals would allow competing firms to vie for business, taking advantage of trade deals that open new markets.

In the early days of the Reciprocal Trade Agreements Act (RTAA) of 1934, the transactional approach was considered but ultimately rejected. The U.S. government did not want to be a broker for deals on a multitude of products that could be tainted with favoritism and open the county to retaliation if the deals undercut exports from another country. Rather, the prevailing view was that the U.S. economy would benefit more in the long term from market-oriented trade driven by the private sector.

Applying the results of the negotiations on an unconditional most-favored-nation (MFN) treatment could be another strange attractor. Conditional MFN means that a U.S. concession granted to one country would not be granted to another unless that country also granted the United States a concession. Although this worked for 150 years or so, when faced with discriminatory tariffs in Europe following World War I, the United States realized that cutting new trade deals using conditional MFN would open it up to retaliation, creating a complex of varying tariffs for different countries with attendant rules of origin and transshipment issues. Even the tariff-happy Senator Reed Smoot (R-UT) favored a “simple, straightforward” U.S. commercial policy based on granting equal treatment to all nations and requiring that same treatment for the United States from others.

As bilateral talks on a product-by-product basis began under the RTAA, negotiators learned that tariff concessions on a specific good should be only offered to principal suppliers of that good. Cutting tariffs on goods from a minor supplier would open the United States to claims of discrimination and the threat of retaliation from large suppliers. For example, reducing duties on footwear from India, which accounts for less than 1 percent of imports, would not please Indonesia, which accounts for about 9 percent.

Even in engaging with far fewer than ninety countries, RTAA negotiators felt the need to develop a template to incorporate tariff concessions and obligations on domestic commercial provisions that could undercut the effect of tariff reductions, such as internal taxes, quotas, monopolies, and government purchases. The final section of the template covered administrative matters such as exceptions, reservations, consultations, duration, and possible withdrawal from the agreement.

Following World War II, with more countries interested in trade, the Harry S. Truman administration adopted a hybrid approach, pursuing bilateral negotiations on tariffs and multilateral negotiations on rules contained in the RTAA template. Using ideas proposed by Treasury Secretary Scott Bessent and Robert Lighthizer, the U.S. trade representative in the first Trump administration, the current Trump administration could suggest a new trade regime populated by countries with democratic governments and mostly free economies that meet certain trade and security criteria. That new regime could apply low tariffs among members and higher tariffs on nonmembers.

Such a group could also incorporate appropriate World Trade Organization rules by reference and take up European Union ideas to modernize, reform, and stabilize the international trading system. This forum also could discuss common approaches to China’s use of subsidies and other state supports to dominate certain industries globally, such as electric vehicles.

Serious diplomatic hurdles stand in the way of such a regime, however. Many countries will be wary to negotiate such deals when the Trump administration has ignored existing agreements, even those negotiated in its first term. And second, the Trump administration has shown that it is reticent to move negotiations into multilateral or plurilateral settings.

As to the first concern, a multilateral setting would provide transparency, an opportunity to improve trade rules, and common action against abuses of the open, market-oriented trading system. Essentially, some countries could find open negotiations with the Trump administration, even with their attendant difficulties, preferable to China’s anticompetitive practices. To encourage respect for any new, plurilateral agreement, a snap-back provision would allow countries to impose countermeasures if a country were to withdraw its concessions or seek additional concessions. Negotiations to resolve the issue could ensue. But the right to retaliate before talking could be a deterrent.

On the second concern, the Trump administration could argue that moving to a plurilateral venue will allow it to cut ninety deals (even if it were to take longer than ninety days), because trade negotiations are, by their nature, technically complex. Such a venue could be used to work with allies to counter Chinese unfair trade practices in the shipbuilding industry, as mandated in the executive order on Restoring America’s Maritime Dominance. Another incentive could be to call the negotiations “the Trump Round,” like previous rounds named after those who initiated the talks, namely, Treasury Secretary Douglas Dillion and President John F. Kennedy.

In sum, allowing the weight of trade negotiation experience to exert influence, like strange attractors in chaos theory, some semblance of order could emerge. However, more policy zigzags will just result in more chaos.

James Wallar is a former U.S. Treasury official and advisor to the CFR RealEcon initiative.