President Donald Trump’s trade war threatens renewed inflation, slower growth, permanently elevated interest rates and lower stock prices. However, Treasury Secretary Scott Bessent has the correct instincts to set things right.

The Administration is seeking agreements with major trading partners to lower barriers to U.S. exports and investments, and Bessent apparently sees a need to permanently unwind the high reciprocal tariff on China

Globalization With Guardrails

Multilateral trade with like-minded western and emerging-market nations, premised on our comparative advantages in technology, finance and services, would maximize benefits for the U.S. economy. However, specialization should be tempered so as to not compromise manufacturing’s contribution to R&D and innovation, self-sufficiency in military equipment, essentials like medicines and semiconductors and adequate supplies of other everyday goods during wars and other national emergencies.

Trump threatening Canada with economic chaos and annexation an casting doubt on U.S. security commitments in Europe and the Pacific makes protectionism more likely and reduces the scope of markets for U.S. high-tech products. That will unnecessarily limit U.S. research budgets and impair, not support, continued U.S. leadership in advanced technology.

Growing global commerce and the dollar’s role in 90% of foreign exchange transactions requires annual U.S. current account deficits and attendant foreign sales of U.S. Treasuries and other assets to sustain liquidity, but those deficits needn’t be $1.1 trillion.

Global trade is growing at about $1 trillion annually and likely requires additional U.S. assets of about one-half to two-thirds that amount. Simply, divide $1 trillion by the velocity of money (1.4) and then consider the dollar’s declining share of foreign central bank reserve assets.

Given the security risks attendant with continued dependence on China for many critical products, that reduction in U.S. imbalances should be mostly accomplished by erasing the $300 billion bilateral merchandise trade deficit with China.

Trade With Friends

More balanced U.S. trade with friendly nations based on comparative advantages requires negotiating down tariffs and nontariff barriers and export-related subsidies and realigning currency exchange rates.

As the limited deal just struck with the UK demonstrates, those are formidable tasks within the 90-day suspension of Trump’s reciprocal tariffs.

The United States should rejoin the 11-nation Trans-Pacific Partnership, which includes Vietnam, Malaysia, Japan and other key partners like Mexico and Canada and encourage UK and EU participation. The TPP addresses most of the non-tariff issues that should concern the Trump Administration.

Trump should recognize the progress on illegal border crossings and combatting the illicit drug trade by removing his recent tariffs on aluminum, autos and other North American trade, and work toward free trade agreements with the Asian partners, the EU and other countries that remove most tariffs and nontariff barriers.

Equitable trade would then permit the United States to reduce its current account deficit to the extent Congress reduces the need for foreign Treasurys sales to finance ever larger federal budget deficits by cutting spending more than taxes.

Bessent would like to encircle China with commitments from our trading partners to limit trade with the Middle Kingdom. That’s a big ask, given its large domestic market and credible threat to retaliate against nations that overtly cooperate.

At minimum, we should expect credible, effective measures to stop the transshipment of Chinese goods through our trading partners. And the United States can structure its tariffs toward China in a manner that provides an incentive for other nations to limit imports from the Middle Kingdom.

China

China seeks to dominate the global stage through “brute force economics.” President Xi’s goal is control of vital industries, from shipbuilding to semiconductors. And to minimize its dependence on other countries while maximizing their dependence on Beijing.

That limits the realistic scope for constructive dialogue, and the United State should simply impose balanced bilateral trade in goods.

In 2024, U.S. merchandise imports from China were $438 billion—about three times U.S. exports. We can’t end such intense dependence overnight, but we could work it down over the remainder of Trump’s second term.

Specifically, require licenses to import goods from China and initially set the value of those to 2.5 times the size of U.S. imports starting in July. Then reduce that ratio in steps to one over three years.

Those licenses should be allocated by auction, and U.S. businesses like Apple that claim an absolute need to source from China won’t require exemptions—the auction process will reveal the value they place on that privilege.

Similarly, the United States should apply the ad valorem rate implied by the auction price of those licenses to the Chinese content of goods imported from third countries. The American privilege to do so should be incorporated in the trade agreements the United States is now negotiating with other trading partners.

Either our allies limit their imports from China, or we should help them do it.

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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.