International Economic Policy as an Instrument of National Power

In his second term, President Trump has elevated international economic policy to the apex of America’s foreign policy. He has placed economic considerations on par with hard power as both a motivating factor for policy changes and as a critical tool for achieving policy ends. This paper will survey the policy and strategic landscape as it stands in June 2026 and analyze the prospects for substantive progress against the enduring ends of American policy, including domestic prosperity and economic security.

The Rise of International Economic Policy

The United States is unlike many other developed countries in the relatively small role the external sector plays in the economy. With a large and wealthy population, a continental internal market, and rich natural resource endowments, our domestic economy and wellbeing are less dependent on other nations than any other country of note in global affairs.

Nonetheless, international economic policy—foreign trade, inbound and outbound foreign investment, etc.—has become an increasingly important element of domestic political debate and of U.S. government policy. This trend is attributable to many factors including the disproportionate importance of foreign trade to domestic manufacturing. But no factor is more important than the political rise of President Trump, who has longstanding and deeply held views on international trade. These views were both an animating factor in his decision to seek office and a central part of what he personally seems to value most highly in terms of presidential accomplishments.

The 2025 National Security Strategy, which is at pains to adopt the tenor and tone of the president, summarizes his views well by arguing that “so-called ‘free trade’ … hollowed out the very middle class and industrial base on which American economic and military preeminence depend.”¹ 

The NSS goes on to declare, “cultivating American industrial strength must become the highest priority of national economic policy.”² To that end, America “will no longer tolerate, and can no longer afford, free-riding, trade imbalances, predatory economic practices, and other impositions on our nation’s historic goodwill that disadvantage our interests.”³ With this framework, the NSS lays out six foci for the administration’s international economic agenda: 

1.     Balanced Trade

2.     Securing Critical Supply Chains and Minerals

3.     Reindustrialization

4.     Defense Industrial Base Revitalization

5.     Energy Dominance

6.     Financial Sector Dominance

From Strategy to Policy

With these priorities identified, the president has adopted several policies with the aim of advancing American interests in each of these areas. No tool, however, has proven more important than import tariffs. The tariffs serve two principal purposes. First, they provide leverage for negotiations. Second, the so-called universal tariff—originally set at 10 percent and now effectively reimposed under new legal authorities at two rates: 10 percent and 12.5 percent—and various sectoral tariffs levied under sundry legal authorities seek to directly further the reindustrialization and supply chain priorities.

As a tool of negotiation, the tariffs set an explicit price on foreign access to the American market. Other countries face a choice between paying in cash or policy concessions. To date, 18 trading areas representing a large share of U.S. trade have made deals with the administration.⁴ These agreements have ranged widely in terms of their legal form and specificity. As the Swiss Army Knife of Trump’s international economic policy, most of the agreements have included provisions intended to increase cooperation on export controls, supply chain resilience, screening of foreign investment, critical minerals, and defense trade.

The abrupt imposition of the tariffs, coupled with the rapid-fire, unilateral adjustment of rates has engendered ill will among many U.S. trading partners. Traditional trade agreements lacked an overtly coercive element, which left the parties to the agreement invested—to some degree—in the success of the agreement. As of now, however, it remains uncertain to what degree these more aggressively negotiated agreements will hold as U.S. courts have begun to make clear the limits of the president’s unilateral tariff authority. Without the credible threat of prompt reimposition of steep rates, tariffs may have lost some of their punch as a negotiating tool.

As a tool of sparking reindustrialization, tariffs have not proven effective. As I noted in “Tariffs, Trade & Geoeconomics” for last year’s Reagan Institute Strategy Group meeting, America’s manufacturing sector is robust: manufacturing accounts for about 9 percent of annual economic output with the sector having more than recovered from the financial crisis and the COVID recession.⁵ This reality is obscured by the secular decline in employment in the sector—down 36 percent since its peak in 1979—and the rapid rise of Chinese manufacturing.

The tariffs have had little impact on any of these facts. Industrial production is up less than 1 percent since “Liberation Day” and employment in the sector has fallen by 2 percent. In fairness, industrial investment decisions are made over long time horizons and often result in higher industrial output only years after the initial investments. Nonetheless, there is little indication of any change in the trajectory of investment in plants, property, and equipment that would precede an industrial boom. This is despite the significant surge in investment in data center construction and equipment. There have been several announcements of inward investments in manufacturing capacity (often as a result of the trade negotiations), but it remains to be seen how much of this investment materializes. The realization of these announced investments will determine whether significant progress is being made in increasing the security of critical supply chains, whether for pharmaceuticals, critical minerals, or other materials.

In sum, the volatility and costs of the high tariff policy have made it harder for businesses to plan and invest. And the higher costs for imported inputs to production have reduced the cost competitiveness of U.S. manufacturing.

Other aspects of the administration’s international economic policy have proven more successful. Notably, American energy production is at record high levels. Given the disruptions to energy markets resulting from the war with Iran, U.S. energy is more important to global markets than at any time in recent history. Coupled with predominant U.S. influence over Venezuelan oil production and export, the United States is effectively the most important energy producer in the world. This energy dominance has somewhat insulated the U.S. economy from the direct effects of recent higher energy prices. The war in Iran has also fractured OPEC, which could result in more market-driven production and supply decisions once the war is over.

Similarly, U.S. financial markets remain central to global finance. Despite unprecedented levels of peacetime deficits and debt, the demand for dollar-denominated assets remains strong. U.S. financial institutions continue to be well capitalized and tightly integrated into international commerce and investment. And although multiple states continue to grumble about the extraterritorial application of U.S. economic power, which is facilitated in large part by dependence on the U.S. financial system, no realistic alternatives have emerged. Congress and the administration have also taken steps to establish a regulatory regime for cryptocurrencies, preparing the U.S. financial system for the possibility that this form of financial innovation could become economically or strategically significant.

A Special Case: The Defense Industrial Base

As discussed above, the broad state of U.S. manufacturing is largely unchanged. However, the defense industrial base has been undergoing the most significant period of change since the Last Supper. Pentagon leadership has seemingly internalized a decade plus of concerns about inadequate DIB capacity, overreliance on the traditional prime defense contractors, and inadequate funding levels and channeled the resulting conviction into a defense program unmatched since the Reagan Administration.

Famously, U.S. merchant John Wanamaker observed, “half the money I spend on advertising is wasted; the trouble is I don’t know which half.” Defense leaders are faced with a similar challenge: it is unquestioned that a significant share of the defense investment budget is wasted; the trouble is we do not know which parts. The United States has more capacity for defense spending than any other country by virtue of the size of our economy and the capital we are able to attract from around the world. But the peculiarities of the defense sector—only one buyer of largely purpose-built capabilities—have historically resulted in a high level of variance between successful and cost-effective defense innovations and failed programs that cost too much and took too long. Whether the Department will be able to increase the efficiency with which more defense dollars become more defense capability is therefore the main challenge for the Department’s civilian leadership.

Concluding Thoughts 

That the Trump Administration represents a break from traditional U.S. international economic policy is undisputed. But the advantages and disadvantages of that departure are likely much less consequential than often supposed. Because the external sector is relatively small compared to the bulk of the U.S. economy, success or failure in international economic policy is of secondary importance to getting core domestic economic policies—rational fiscal policy, rule of law, liberty to innovate and to fail—right. The wellspring of American prosperity and global power lies less in whether we trade with the world efficiently than in whether we get and keep our own house in order.