Introduction

The Trump administration’s “Liberation Day” tariffs — beginning at 10 percent for all trading partners and rising as high as 46 percent for countries like Vietnam — have been widely interpreted as simply another round of protectionism. While most analysts recognize these tariffs are a negotiating tactic rather than a final policy, they’ve largely overlooked the broader strategic objective behind them.

What makes these tariffs different is how the administration is defining success. The metric that matters isn’t bilateral tariff reductions, but addressing persistent trade imbalances. As administration officials have signaled, any policy mix that narrows a persistent surplus — whether through currency revaluation, reduced export subsidies, or stronger domestic demand — would satisfy Washington’s benchmark and trigger tariff relief. Tariff alignment is one visible concession, but it represents just one path toward the ultimate goal.

In our view, these tariffs represent the opening move in a deliberate strategy to reshape the global trading system. Specifically, we believe the administration is working to build a new trade bloc centered on balanced trade and shared standards, while compelling countries to join a coordinated economic front against persistent surplus nations, particularly China. This is what we’ve previously called the formation of a “coalition of the compelled.”

The evidence for this interpretation is mounting. When Israel recently offered to drop its tariffs on U.S. goods in exchange for relief from the new tariffs, the administration rejected the proposal. Similarly, when Vietnam reportedly offered to lower its tariffs on U.S. goods to zero, trade advisor Peter Navarro dismissed the gesture, saying, “Don’t say you want to lower the tariffs and be done with it.” These rejections confirm that simple bilateral tariff reductions aren’t the goal. Instead, as we argued in our analysis of the Mexican and Canadian tariffs earlier this year, “The U.S. will drop these tariffs only if Canada and Mexico explicitly agree to join in imposing their own tariffs against persistent surplus countries.”

This coalition-building approach has deep historical roots. From the Napoleonic Continental System of the 1800s to the Western Export Control Bloc of the Cold War, nations have repeatedly formed economic coalitions to coordinate trade policies and pressure countries running persistent surpluses. What distinguishes the current approach is its ambitious scope — a fundamental realignment of the global trading system that has allowed certain countries to maintain structural surpluses at the expense of deficit nations like the United States.

In this paper, we examine the strategic rationale behind these tariffs, viewing them not as isolated economic tools but as part of a coordinated effort to restructure the global trading system. Drawing from economic history and the administration’s own signals, we argue that these measures are designed to build a new trade bloc around the principle of balanced trade, enforced through a coalition of countries compelled to act in concert.

The Mexico-Canada Gambit: First Steps in Coalition Building

In our earlier analysis, “Making Sense of the Seemingly Nonsensical Mexican and Canadian Trade War,” we argued that what appeared to be a puzzling conflict with America’s closest trading partners was in fact the first move in a larger strategic effort. We suggested that the administration was using targeted tariff pressure not simply to extract bilateral concessions, but to compel broader alignment against persistent surplus nations. That assessment appears increasingly accurate in light of recent developments.

Mexico and Canada were notably excluded from the newly announced “Liberation Day” reciprocal tariffs, and that exclusion was no accident. Mexico was the first to explicitly signal a willingness to impose tariffs on Chinese imports, which likely prompted the administration to ease pressure on them. Canada, by contrast, initially chose to play hardball and resisted aligning with the U.S. strategy. This shift in posture explains why the administration pivoted its focus toward Canada. However, we believe Canada may now have quietly indicated a willingness to cooperate, which could explain their continued exemption from the latest round of tariffs.

This pattern supports our assessment that the tariffs are not just about correcting bilateral trade imbalances. They are part of a strategy to compel other countries to join a coordinated economic front against persistent surplus nations, with China as the central focus. The administration’s rejection of Israel’s offer to reduce bilateral tariffs, along with its similar response to Vietnam’s offer to cut its tariffs on U.S. goods to zero, signals that tariff reduction alone is not the objective. Instead, the aim appears to be the formation of a broader trade bloc grounded in the principle of balanced trade and built around countries willing to adopt common measures against surplus-driven trade practices.

Beyond Tariffs: The Balanced Trade Benchmark

Peter Navarro, April 2024: “Don’t say you want to lower the tariffs and be done with it. It’s the non-tariff cheating. Stop manipulating your currencies. Stop dumping stuff in.”

Trade intervention is rarely limited to customs duties. Any policy that implicitly taxes household consumption in order to subsidize domestic production tilts the current-account balance. In practice, that umbrella covers subsidized credit from state banks, VAT or excise-tax rebates on exports, wage-suppression pacts that hold labor costs below productivity, deliberate currency depreciation, infrastructure booms financed by below-market borrowing, and outright financial repression that caps deposit rates and channels cheap funding to favored firms. Each of these measures functions in the same way: they either implicitly, or explicitly, tax consumption or subsidize production, creating an economy where domestic demand is too weak to absorb domestic production. The inevitable result is a widening trade surplus as the excess production must be exported.

Trade Intervention for Freer Trade

Having established that the administration appears to be building a coalition through its tariff policy, we should examine the strategic thinking that might underpin this approach. While much attention has focused on Stephen Miran’s “User’s Guide to Restructuring the Global Trading System” for insights into the administration’s economic thinking, Michael Pettis’ recent report “Trade Intervention for Freer Trade” provides a framework that appears to align with the strategy we’re observing.

Pettis is widely respected in economic policy circles, and his analysis of global trade imbalances has influenced thinking within the administration. Like us, Pettis argues that capital flow tools would be the optimal approach for addressing global imbalances, pointing out the limitations of tariffs as a primary solution. He notes that “tariffs can only force a change in the excess of savings over investment in the rest of the world if they are set at such a high rate that they force a contraction of foreign production, followed eventually by an expansion of foreign demand.”

Despite this limitation, Pettis acknowledges that if tariffs are the chosen path, a coalition-based approach offers the most effective implementation:

“The United States could both build a broad consensus around reimagining the global trade system and address this problem of uniformity by making countries exempt from tariffs if they agree to join an agreement to implement similar ‘anti-mercantilist’ tariffs. The United States could presumably wield tariffs more effectively and in a more targeted way, as part of a broader reorganization of trade aimed at creating new trade agreements that commit countries to maintaining broadly balanced trade.”

This strategic approach draws from historical precedents that Pettis, as a student of financial history, has studied extensively. The pattern of using exemptions to build a coalition that collectively pressures surplus nations echoes successful trade strategies throughout economic history.

We recognized this same historical pattern in our 2018 report during Trump’s first term, when we wrote:

“While we maintain that targeting capital flows would be the most effective approach to address trade imbalances with China, the administration appears hell bent on using tariffs as their primary tool. If tariffs are the chosen method, history offers clear lessons on their effective implementation. Rather than pursuing a purely bilateral approach, the US should leverage its diplomatic and economic influence to create a coalition of countries that collectively agree to implement similar tariff structures against persistent surplus nations like China. This approach would prevent China from simply redirecting exports through third countries and would create the necessary leverage to force meaningful structural reforms in China’s economic policies.”

The striking parallel between these analyses — both acknowledging the limitations of tariffs while recognizing coalition-building as the most effective implementation strategy — is not coincidental. Both draw from the same historical lessons about how nations have successfully used economic pressure to address structural imbalances.

These historical examples can help us better understand what the administration may be attempting to achieve with its current tariff strategy. By examining past coalition-building efforts, we can gain insight into both the potential effectiveness and limitations of the current approach.

Historical Precedents for Coalition-Based Trade Strategies

To understand the rationale behind what we believe to be the administration’s current approach, it is useful to examine the historical record. For countries facing persistent imbalances or rising economic competitors, coalition-building often proves to be the more effective strategic path then going at it alone. The current approach appears to be following this well-established playbook.

The British Imperial Preference System (1932)

Perhaps the most relevant precedent is the British Imperial Preference system established in 1932 through the Ottawa Agreements. In the wake of the Great Depression, Great Britain and its dominions (Canada, Australia, New Zealand, South Africa, and others) formed a trade bloc that created a coalition-wide protective tariff structure. The system worked by mutually reducing tariffs among Commonwealth members while raising tariffs against non-Empire countries.

This “Empire First” policy was explicitly designed to counter the trading power of the United States and Germany, both of which were seen as competitive threats. The guiding principle was “home producers first, empire producers second, and foreign producers last” — a framework that bears striking resemblance to the current administration’s approach of prioritizing domestic and aligned economies. The Imperial Preference system successfully increased intra-Empire trade shares while constraining access to these markets for non-Empire exporters.

The Napoleonic Continental System (1806–1814)

An earlier and more aggressive coalition-building approach was the Continental System implemented by Napoleon Bonaparte. The French Empire organized a coalition of allied European states to enforce a continental blockade against British trade. The system aimed to paralyze Britain’s economy by cutting off its trade with continental Europe, effectively using coordinated economic warfare against what was then the world’s leading trading nation.

While the Continental System did inflict economic pain on Britain, it ultimately failed to achieve its objectives. Britain found alternative markets through its naval supremacy, and the blockade created significant economic hardship in continental Europe, breeding resentment among Napoleon’s allies and contributing to his eventual downfall.

Western Export Control Bloc (CoCom, 1949–1994)

The Coordinating Committee for Multilateral Export Controls (CoCom) represents perhaps the most direct parallel to what the Trump administration may be attempting today. Early in the Cold War, the United States led a coalition of Western-aligned nations (NATO members, Japan, Australia, etc.) to coordinate embargoes on strategic exports to the Soviet Union and its Eastern Bloc allies.

CoCom members prohibited or strictly licensed the export of military and dual-use technologies to Communist countries. To enforce coalition alignment, the U.S. passed the Battle Act of 1951, threatening to cut off American aid to any ally that violated CoCom controls by trading with the Eastern bloc, a clear example of “compelled alignment” similar to what we may be witnessing today with tariff pressures on allies.

CoCom successfully limited Eastern access to advanced Western technology for decades, contributing to the Soviet bloc’s technological lag and economic stagnation. It demonstrates how a determined coalition can maintain economic pressure over an extended period, even when some members occasionally chafe at the trade restrictions.

The “ABCD” Coalition (1940–1941):

This informal alliance between the United States, Britain, China, and the Dutch East Indies (now Indonesia) coordinated a series of embargoes targeting Imperial Japan in an attempt to curb its expansionist aggression across Asia. Japan, heavily dependent on imports for critical resources like oil, rubber, and steel, quickly found itself cut off from vital supply lines.

Although the participating countries did not formalize their cooperation through treaties, they coordinated their actions closely enough to function as an effective economic bloc. The United States led the charge, but British and Dutch participation was essential in sealing off regional access to energy supplies. China, under constant threat from Japanese aggression, was a natural participant. The embargo ultimately provoked a military response (Japan attacked Pearl Harbor in December 1941) but the coalition itself demonstrated that informal, coordinated economic pressure could be used to isolate and confront an adversary.

What makes the ABCD model particularly relevant today is the way it functioned without formal institutional structures. It was ad hoc, built around a shared recognition of threat and a common willingness to use economic leverage. The Trump administration’s approach may be drawing from this same logic — building a coalition of aligned countries through pressure, coordination, and shared purpose, even in the absence of a formal trade agreement.

The European Economic Community (1960s):

Another relevant precedent for today’s coalition-based trade strategy is the European Economic Community (EEC) and its adoption of a Common External Tariff (CET) beginning in the 1960s. While the EEC was initially conceived as a project of economic integration among member states, its external tariff structure effectively created a protectionist bloc that coordinated trade policy against non-member countries. The EEC’s CET applied uniform tariffs on imports from outside the bloc, turning a group of individual economies into a single economic unit with shared trade defenses.

The most famous example of the bloc’s actions came during the so-called “Chicken War” of 1962–1963, when the EEC sharply raised tariffs on imported frozen chicken from the United States. American producers had gained substantial market share in Europe by offering cheaper poultry, threatening domestic farmers in EEC member states. In response, the EEC acted as a cohesive unit, restricting U.S. imports through a coordinated tariff increase.

The United States retaliated with targeted tariffs of its own, most notably a 25 percent duty on imported light trucks, a measure that remains in place to this day. Though the immediate dispute eventually cooled, the episode revealed how even among allies, trade blocs can become vehicles for economic confrontation when national interests diverge. More broadly, it demonstrated how a coalition of nations, when aligned around shared economic interests, can amplify their leverage against external competitors, regardless of diplomatic ties.

In today’s context, the EEC’s use of a Common External Tariff offers a valuable example of how trade policy can be unified across borders to protect domestic industries and assert economic influence. The Trump administration’s effort to build a new trade bloc focused on balanced trade and aligned tariff policy may mirror this approach, bringing together countries not only to reduce dependence on surplus nations, but to act with shared discipline in confronting external imbalances.

The OPEC Oil Embargo (1973–1974):

The 1973–1974 OPEC oil embargo stands as one of the most consequential examples of coalition-based economic coercion. In response to U.S. support for Israel during the Yom Kippur War, Arab members of OPEC, along with Egypt and Syria, imposed an embargo on oil exports to the United States and other Western nations. At the same time, they sharply cut oil production, sending global prices skyrocketing.

This coalition succeeded in weaponizing control over a critical resource to achieve geopolitical leverage. The economic shock inflicted on the West demonstrated the power of a coordinated supply-side coalition. While the embargo was eventually lifted, it shifted global energy strategy and demonstrated how a bloc of aligned producers could exert enormous influence over the international economic system.

The OPEC example is particularly relevant today as China, Japan, and South Korea reportedly met to discuss a joint response to U.S. tariffs. These nations appear to recognize that the United States is actively working to build a coalition using protectionist tools to challenge persistent surplus countries. In response, they may be attempting to form a counter-coalition of their own.

Rather than imposing tariffs, these three export powerhouses could potentially threaten to cut off vital exports to countries or blocs using protectionist measures against them, similar to OPEC’s strategy of weaponizing critical resources. The OPEC experience demonstrates that countries without natural alliances and even with deep historical mistrust (as was the case with many OPEC members) can still work effectively together when their economic interests align.

However, there are major obstacles to such an effort. First, all three countries run large structural trade surpluses and maintain undervalued currencies. In a potential trade bloc among them, they can’t all be net exporters as someone would have to absorb the surplus. Second, these countries are not strategic allies. Historical tensions, political mistrust, and diverging national interests limit the potential for deep coordination. In a trade war, demand is the most valuable asset, and the United States still holds it. That leverage not only strengthens the U.S. position but also limits the viability of alternative coalitions built around export-driven economies.

What History Teaches About Coalition Power

While the tactics may look new, the underlying strategy has been used many times before. Examining the historical record is not just useful for understanding what the administration might be trying to achieve but also offers valuable insight into how these kinds of strategies succeed, and why they often fall short.

First, coalition unity is critical. Economic pressure only works when it is applied consistently. When coalition members act at cross purposes, as the League of Nations did during its failed attempt to sanction Italy in the 1930s, the strategy collapses under its own weight.

Second, leadership requires leverage, especially against entrenched economic relationships. In the most effective coalitions, such as CoCom during the Cold War, the United States used both incentives and penalties to maintain alignment among its partners. The Battle Act of 1951, which threatened to cut off American aid to any ally violating CoCom controls, exemplifies how economic pressure was necessary to ensure coalition discipline.

When we proposed our coalition-building strategy in our 2018 paper, we underestimated the practical challenges involved in building an international coalition to confront a major economic power like China. While the strategic logic behind coordinated pressure remains sound, the effort to align multiple countries in a unified economic front is an extraordinarily difficult diplomatic task. Many nations are understandably reluctant to jeopardize their relationships with China, particularly as their economies have become deeply intertwined through trade and supply chains.

This historical resistance helps explain why the Trump administration is taking such aggressive steps, from steep tariff rates to a more confrontational posture with allies like Canada. The administration seems to understand that building this kind of coalition won’t happen through quiet diplomacy alone. It requires real leverage and sustained economic pressure to compel countries to align. This approach recognizes that in the face of powerful economic incentives pulling in the opposite direction, only significant countervailing pressure can overcome the gravitational pull of existing trade relationships.

Third, economic integration makes coalition-building more feasible. The British Imperial Preference system succeeded in large part because the economies within the Commonwealth were already closely linked. The modern equivalent may be the USMCA, which provides a natural foundation for building a broader trade coalition that includes nations with shared interests and established ties.

Fourth, history shows that counter-coalitions may emerge in response to economic pressure, but they rarely succeed without deeper alignment. As the OPEC precedent suggests, while such counter-coalitions can inflict significant economic pain, they often struggle to achieve lasting strategic goals, particularly when the coalition members themselves have competing interests and are bound primarily by a shared opposition rather than deeper alignment. This dynamic may play out again as surplus countries like China, Japan, and South Korea explore coordinated responses to U.S. pressure.

Finally, coalition-building itself is not an improvised response, but a well-worn strategic playbook. Throughout history, nations have turned to economic alliances to confront rising powers and reassert control over the terms of trade. The Trump administration’s current approach fits squarely within that tradition.

Conclusion

We believe the Trump administration’s tariff policy is not simply an act of protectionism, but part of a broader strategy to realign the global trading system by pressuring persistent surplus countries and building a coalition committed to balanced trade. This approach has clear historical precedents and, in many ways, follows a well-established playbook used by nations seeking to reshape global economic rules.

For the administration, the litmus test is simple: is the partner’s surplus shrinking in a durable way? Once the balance turns, tariffs become expendable. Until then, investors should expect the pressure, tariff or otherwise, to intensify.

That said, we believe that relying primarily on tariffs to rebalance global trade is ultimately misguided. While tariffs can generate leverage in the short term, they carry significant long-term costs and risk reinforcing global fragmentation. A more effective and sustainable solution lies in addressing the capital account. Measures that regulate capital flows, particularly by discouraging the recycling of large surpluses into U.S. financial assets, would better address structural imbalances at their source.

We continue to anticipate such capital flow measures are coming, but they take time to design and implement. One potential catalyst is the upcoming release of details around the proposed sovereign wealth fund, expected from the Departments of Treasury and Commerce in May. If the administration is serious about structurally rebalancing trade, that announcement could mark a broader strategic shift from tariffs toward capital flow management.

It is important to acknowledge that our hypothesis, that the Liberation Day tariffs represent a strategic attempt by the Trump administration to build a coalition-based trade bloc, is inherently speculative. Yet successful investing often demands precisely this type of speculation, grounded in rigorous logic, historical pattern recognition, and strategic foresight. The investment implications of such a coalition would be significant and wide-ranging, underscoring the importance of proactively game-planning potential scenarios.

In this context, we are reminded of a remark by Lloyd Blankfein, who, when asked about what makes his firm effective at navigating the future, responded:

“What we aspire to is less foresee the future and more be a great contingency planner. Sometimes, if you contingency plan really well, you can respond very fast to what’s happening because you thought through all the possibilities. You can get off the mark so quickly it looks like you false started. It looks like you anticipated the start. When all you’ve really done was listened so closely and knew what you were going to do that you got off the mark quickly.”

Our goal in providing this analysis is not to predict the future with certainty, but to anticipate plausible scenarios clearly enough that we can respond decisively and capitalize on opportunities the moment they emerge.

Editors Note:

This analysis was originally published on our Medium site. Since publication, Treasury Secretary Scott Bessent has publicly confirmed our core hypothesis, stating that he envisions reaching trade agreements with US allies that would then lay the ground for a collective approach toward Beijing to address what he described as China's unbalanced trade structure. This confirms our assessment that the administration's tariff strategy is designed to build what we termed a "coalition of the compelled" to address persistent trade imbalances.