The Paradox of Trump's Economic Weapon Revisited

Why U.S. coercion has been more effective against allies than adversaries

In March of this year I wrote an article about Trump’s use of economic pressure for Foreign Affairs. Was there any pattern that could be discerned in his apparently erratic use of threats and coercion? In the resulting piece, The Paradox of Trump’s Economic Weapon, I argued that despite a great deal of whiplash-inducing arbitrariness, there was some method to the madness.

Trump was significantly increasing the pressure on American allies while at the same time compromising with countries that oppose U.S. power, especially Russia, China, and Iran. This paradoxical pattern–squeezing allies while approaching rivals more cautiously–was due to the uneven economic leverage enjoyed by Washington. America’s allies were more invested in sustaining good relationships with it. Hence they would be more likely to give in to economic threats and coercive measures than more hostile countries that were not expecting a near-term improvement of relations with the United States. (This pattern was first outlined by Dan Drezner in his 1999 book The Sanctions Paradox–still well worth reading.)

Eight months later, I would say that the course of the trade war so far has largely confirmed my analysis: close allies in London, Brussels, Seoul, and Tokyo have all rushed to conclude very lopsided deals with Trump, while leaders such as Xi, Modi, Lula, and Putin have hardly budged even in the face of heavy tariffs, new sanctions, and additional export controls. U.S. economic pressure remains more effective against allies than against adversaries, and Trump has perversely used this fact to his advantage.

The Conceders

The group of states who have thus far signed trade “deals” can be divided into two groups: close security allies on the one hand, and Asian economies that are part of supply chains which end in the North American market on the other.

a. Allies: United Kingdom, European Union, Japan, South Korea, Australia

b. Asian exporters: Indonesia, Vietnam, Philippines

My confidence that the paradox would hold stemmed from the fact that the uneven incentives to give in to U.S. economic pressure long predated Trump. Since World War II, many U.S. administrations have pressured West European and East Asian allies to abandon policies they did not like; from forcing the Dutch break off their counterinsurgency in Indonesia by threatening to withhold Marshall Aid, to pressuring the French in Algeria and the Brits during the Suez Crisis, to putting the squeeze on Japanese companies in the 1980s.

Nor were such threats always economic. Very few people remember today that the Nixon and Ford Administrations used the threats of U.S. troop withdrawals from West Germany and South Korea to force Bonn and Seoul into giving up their independent nuclear ambitions in the 1960s and 1970s. The Cold War was a lot more “multipolar” than we like to think.

Nixon’s preferred leverage: threatening U.S. troop withdrawal from Europe. Photo credit: US Army.

At the time these threats may have been justified as non-proliferation steps. But today we can see how they came at a serious long-term cost to German and South Korean strategic autonomy. Fifty years later, both countries are rich economies that remain precariously dependent on U.S. security assistance–something that Trump has used in recent months to drag heavy economic concessions out of them that deepen their risky reliance on American technology and energy further still.

Trump has not always advanced the blackmail of allies as a conscious strategy. It is also a subconscious approach that emerges from the micro-dynamics of real-world negotiations. For despite his lack of grasp of the details on many issues, Trump can smell weakness when negotiating with others, and respects strength. This has an important implication: countries with meek leaders are likely to get pushed around, whereas states that are strong enough to hold out and do not flinch can eventually see their way through a lot of the pressure.

Of course, no amount of posturing at the negotiating table can ultimately escape the raw relative power of states. But with Trump, the personal matters to a greater degree than with other U.S. presidents, and it is through personal interactions that the pecking order in the U.S.-led bloc is sorted out. Moreover, who is leading other countries is key not only when it produces national defiance towards America, but precisely when submissive attitudes negate considerable national power. As economic actors, Japan, South Korea, and the EU in particular have much more material heft vis-à-vis the United States than their leaders have deployed.

Indeed, these governments chose to barely play their best cards at all in the trade talks, which thereby became quick capitulations. In early May Japan briefly brought up its holdings of the largest foreign-owned stock of U.S. government debt as a pressure tool in trade talks with Washington, before quickly walking back this powerful threat. The “Treasury weapon” was not a novel idea. It came up in internal Liberal Democratic Party discussions at the height of U.S.-Japanese trade and monetary tensions in the late 1980s and early 1990s. But beset by domestic problems, Tokyo has lacked the nerve to put it on the table in a serious way.

A similar reluctance to use its heft over U.S. private interests is palpable in the EU’s extremely meek responses to U.S. strong-arming. The anti-coercion instrument gives Brussels a potentially far-reaching tool that could be used to impose import and export controls on any U.S. goods and technology, suspend intellectual property rights, and sequester foreign direct investment. The EU pays nearly €700 billion per year for services provided by U.S. firms, mainly in the tech sector, and is the source of perhaps €300 billion in profits by U.S. multinationals–again, mainly tech firms.

U.S. leverage in green, European leverage in red and light blue.

Putting these major flows at risk gives Brussels a major source of pressure on Washington. This is magnified by the importance that the European sales of U.S. firms have on their stock market value and Trump’s notorious sensitivity to equity prices, not to mention the influence of tech CEOs in his administration. Martin Sandbu of the FT was surely right when he pointed out, one day before Von der Leyen’s July capitulation in Scotland, that “the bloc has the strength not to offer the U.S. anything”. That Brussels nonetheless caved has to be explained through reasons that–despite the dooming about European competitiveness–have little to do with raw economic power and are instead personal, political, sociological, and intellectual.

The Holdouts

Compared to the weakness of American allies, those countries that have not surrendered in the trade war stand out all the more starkly. Most prominent are the BRICS economies, of which the first four (Brazil, Russia, India and China) have all withstood considerable rhetorical and diplomatic attacks and major tariff hikes of between 50% and 125%. South Africa seems to be weaker than the others, and more desperate to get a trade deal; but it too has not gone for a quick and early settlement with the United States. If we divide this heterogeneous group of holdouts into political categories, we see that it in fact contains multiple subsets.

a. Rival: China, Russia

b. Non-aligned: Brazil and India

c. Allied: Canada, Taiwan

The main reason that, back in March, I argued that the political gains of pressuring on non-allied states would be lackluster was that U.S. economic coercion in general is less much effective than is usually supposed. Two recent experiences should prompt us to reassess how significant American structural economic power really is (more on this in the future). First, nearly four years of Western sanctions against Moscow have imposed some costs, but not meaningfully set back Russian military and strategic power; nor have they been able to shape the course of the Russo-Ukraine War in a direction beneficial to Kyiv. Second, U.S. export controls against Huawei and Chinese tech firms have aided the very technological catch-up they were designed to forestall (for more on that, see this recent report by Rodrigo Balbontin for the Information Technology & Innovation Foundation).

If anything, I feel that in March I underestimated just how well even non-adversarial governments could face down serious pressure from Washington if they felt their political integrity and national interests were at stake. This is most in evidence in Brazil and India. Both are large democracies, but neither of them have China’s degree of industrial power or Russia’s strategic capacities. Yet they have defied punitive tariffs on their exports to the United States imposed for overtly political reasons.

There is certainly a rally-around-the-flag effect at work here. But it also seems that Delhi and Brasilia have the benefit of seeing from the continued humiliation of European and Asian allies that compliance is not a guarantee of relief. Even after signing bad deals that cost them a lot of money while obtaining nothing in exchange, the Europeans, Koreans, and Japanese still have to worry about what measure Trump might throw at them next. Faced with such uncertainty, it is quite rational for Modi and Lula to cash in on a broad nationalist reaction to American economic hubris while showing their political autonomy as rising powers.

The largest failure of American pressure thus far, however, has occurred towards Beijing. The U.S.-China economic ceasefire that was reached in South Korea last week shows that Washington has less structural economic power than it thinks. I believe we have not yet seen the full consequences for U.S. global influence of China’s unveiling of a material source of leverage–the critical minerals export control regime–that is as powerful as OPEC’s oil weapon in the 1970s. While over the weekend Treasury Secretary Scott Bessent tried to convince Western media that China had overreached, this struck me as spin to distort the less flattering underlying reality: it was the United States that pushed its export controls against China too far, and was then caught unprepared against the inevitable retaliation from Beijing, forcing Trump to scramble to contain the damage to the U.S. economy and its allies.

Here’s my hand. /White House website.

But the delusion about U.S. dominance is not just a MAGA problem. The reactions from Democratic politicians to the deal in Busan show that they too have not grasped the reality of Chinese power. Elizabeth Warren charged Trump with “negotiat[ing] away export controls that his own experts had said were critical to protecting our national security” and complained that “China got exactly what it wanted”.

But Trump could not have obtained more, since he clearly came to a negotiation both in desperation and with the weaker hand. The problem at Busan was not the micro-level interaction between the leaders, but the macro-level imbalance in economic leverage.

Ultimus Davosorum

Incidentally, there is in all this a quite good basic test of who in the world today is a real nationalist. A provisional definition might be: a political leader who genuinely stands up to Donald Trump. This yardstick exposes how supine most European elites have been. It is an especially severe judgment on European right-wing leaders such as Merz and Meloni: politicians who at home claim to protect their country’s national interests from foreign threats, but who have been among the quickest to accept whatever Trump tells them to do.

By this same standard, such leaders as Xi, Erdogan, Putin, Netanyahu, Lula, Sheinbaum, and Modi would count as real defenders of their national interest. There is one more odd person in this category: Canadian prime minister Mark Carney, who has recently struck a more Gaullist-sounding tone in his public declarations. But it is noteworthy that his defiance is explicitly yoked to defending what remains of multilateral liberalism (one wonders what would have happened if Von der Leyen had adopted the same posture on behalf of the EU) and seeks to pursue that project outside of American leadership. In this sense, he is the only major leader who still embodies the systemic ambitions of neoliberal globalism, but without the support of U.S. power: a kind of Kantian Davos man in an age of neo-mercantilists.