Editor's note:

On April 2, 2025, US President Trump declared “Liberation Day” and launched a tariff war against the entire world, including key American trade partners in East Asia. Over succeeding months, additional tariffs were announced, modified, and withdrawn against individual countries and specific goods, such as steel and aluminum. In this April 8, 2026 talk at NYU School of Law, Henry Gao, law professor at Singapore Management University and a trade expert, argues that the Liberation Day tariffs were simply leverage to force other countries to halt disguised transshipment of Chinese goods to the United States. Going forward, Professor Gao calls for rethinking some fundamental rules of the current global trade system, such as most-favored nation status.

The following excerpts have been edited lightly for clarity and brevity. A full recording of the program can be found here. The discussion was moderated by Robert Howse, the Lloyd C. Nelson Professor of International Law at NYU Law.

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By Henry Gao

My discussion is based on two of my recent articles. One, which was published last September in the World Trade Review, is called “(When) Can Trade Wars Be Good,” where I argue that we need to rethink some of the fundamentals underlying the modern multilateral trading system. And the other one is a more recent publication in the American Journal of International Law, which basically looks at the implications of the Liberation Day tariffs on Asia and beyond. I will try to unpack why the Liberation Day tariffs were introduced, what is the Trump administration trying to achieve with the tariffs, how other countries, especially China, have responded, and what are the implications.

On April 2, 2025, Trump unveiled sweeping tariffs against every country in the world, with rates which range from 10 percent, which is the rate that Singapore is getting, to 50 percent, which is the rate that the tiny country of Lesotho in Africa was getting. This really shocked the world. But since the beginning, I had a different idea about the Liberation Day tariffs than other people. … The point of the so-called reciprocal tariffs is not really just to impose these high tariffs against every country in the world forever. It is more to serve as a kind of leverage to force other countries to negotiate with the US.

I understand that many of my friends in Europe, in Canada, in Australia, and so on, are very upset, because they regard themselves as US allies but now they are slapped with tariffs just like everyone else. But I argue that … at the end of the day, it's all about China, and all the other countries are just collateral damage in this grand trade war between the US and China.

[A]t the end of the day, it's all about China, and all the other countries are just collateral damage in this grand trade war between the US and China.

[Professor Gao argued that the first Trump administrations’ 25 percent tariffs on China failed to reduce Chinese exports to the US because of transshipments through other countries.]

If you look at the data from 2018 to 2024, the tiny country of Cambodia, its exports to the US in six years increased three times. Is that because Cambodia has mastered some advanced technology, like Wakanda? No, that is not the case. That is because when you go to Cambodia, you see all these Chinese firms setting up factories, importing parts and components from China and reassembling them, or they just slap “made in Cambodia” on their products, which are entirely imported from China. … That explains why Trump has to impose tariffs against every country. Because otherwise, if you leave any country out, I can guarantee you that the next day you will find hundreds of Chinese firms trying to invest in that country so that they can transship to the US.

That explains some strange things in the Liberation Day tariffs. For example, there was this island [territory] off Australia which is called Heard Island and McDonald Islands. It was imposed a tariff. But then people found out that actually this island was only inhabited by penguins. … There was more than $1 million worth of exports of machinery and electronics from this tiny island to the US. Is that because the penguins all of a sudden started to manufacture electronics and machinery? No, that is because some ingenious Chinese exporter just had sleight of hand when he was doing the customer's declaration. Instead of “China,” he chose “Heard Island and McDonald's Islands.” You can see all these transshipment practices or tariff evasion practices were rampant. And that was why we need to have a global tariff to seal up all these loopholes that China has been using. …

[S]ince Liberation Day, I said China would try to play tough by retaliating, and indeed, that is what happened. China got 36 percent in the first round of Liberation Day tariffs, to which China retaliated immediately, and the US also retaliated by raising to 50 percent. China followed again, until it reached all the way to 125 percent, and then China announced the last round of retaliation. … [T]he next month, you saw that China and the US negotiated in Geneva this truce, whereby both agreed to scale back all their retaliations and escalations and kept only 10 percent of the bilateral tariffs. That surprised many commentators because … a lot of commentators were saying that China has much higher threshold for pain ….

[I]f you look at the relative importance of trade between the US and China, the US is much more important for China than China for the US.

I disagree with this view, because if you look at the relative importance of trade between the US and China, the US is much more important for China than China for the US. If you look at China's trade surplus, in several years China's trade surplus with the US is almost the same as China's trade surplus with the whole rest of the world. This means that the US is the most important market for China. That also explains why, despite all these trade war tariffs against China, from 2018 China has been trying in every way to maintain its exports to the US.

… The US government has published the terms of deals with about a dozen countries. … I did a comprehensive review of the so-called economic security chapters in these agreements. The most interesting thing of all these new agreements, compared to the traditional free trade agreement, is that they all include a section on economic security, which you did not find in all previous free trade agreements, and I argue that it’s all about China.

How about the potential deal with China? … A bilateral deal with China, theoretically, is very simple because the biggest reason for all these imbalances is because of the imbalances in consumption and production. China produced too much, but consumed too little, and the US produced too little, but consumed too much. …

If the Chinese government really wants to increase consumption, the solution is very simple. They can just give more money to the people, or short of that, they can increase the social safety net for everyone. But they don’t want to do that. First of all, there will be less money left to subsidize all these sectors that the Chinese government wants to subsidize. And second, when the people have more money, politically, that could be risky for China. … When people have money on their hands, they are going to demand freedom of choice, not only economically but also politically. …

What are the implications for the world trading system? I argue in my article in the World Trade Review that we need to revisit some of the fundamentals, such as the most-favored nation (MFN) principle, which is basically premised upon the theory of comparative advantage by David Ricardo. If you look at the original example by Ricardo, the two countries he used were the UK and Portugal, which are basically countries with not only similar economic systems, but also similar political and social systems. … [W]e need to rethink fundamental rules such as MFN, because the naive assumption that MFN could apply across different countries with vastly different economic models might not be true. Instead, we might need to think about something like a conditional MFN. That is, in order to enjoy MFN, you would need to fulfill certain minimum conditions – for example, certain issues like labor rights, minimum social safety rights, so that we can make sure that everybody’s competing on a level playing field, Otherwise, MFN would simply become a tool that would prevent countries from optimizing their trade relationships in ways that would benefit each party in that relationship.

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Q&A

Howse: My view is that MFN can still function as a default rule in negotiations, but there are many circumstances where one would want to have the possibility of WTO members, in effect, contracting out from that default rule. What we need to do is revisit Article 24 of the GATT because the departure from MFN in countries contracting out among themselves is very narrow. It only applies to agreements that are overall more liberalizing. The way Article 24 is written would not allow for a rebalancing of sorts based upon considerations of radical differences in social and political economy of different countries. But there's a fair amount of economic literature that suggests that just in terms of the transaction costs of tariff negotiations, using MFN as the default produces better results. But then the question that I ask is: where do we go in these situations of the kind you're discussing?

One possibility that I've suggested in recent work is that the US and China ought to take their trade relationship outside of the WTO, and there was a precedent for that. When the US was confronted with Czechoslovakia – obviously not a powerhouse economy – being a member of the GATT, there was an agreement between the US and Czechoslovakia, a Soviet country at the time, and it was accepted by the WTO membership, that between themselves, WTO rules would not apply, just because they were not intended to work with such huge variances in social and political systems. It seems to me that, whether we think of it in terms of questioning MFN as such, or providing more scope for dealing with situations that are not well captured or addressed through the MFN principle, it definitely deserves a rethink. The issue is how one could reflect that in the legal architecture of world trade.

Gao: Regarding your suggestion to take the bilateral US-China trade relationship outside of the WTO, I agree that that could be a solution. But as China is already a WTO member, it would be harder to do so. … Maybe the US approach of calling for a reform on fundamental issues, like MFN, could be a more plausible alternative.

Professor Jose Alvarez: What makes your remarks particularly provocative is that they’re the exact opposite of what we have heard from James Bacchus, from Alan Wolff, all of whom have suggested that the “liberation” tariffs and everything that has followed is making China great, not making America great. You’re actually suggesting there is a brain behind this, and there’s a strategy that they have missed entirely.

Gao: It has to get worse before it gets better. But I think what Trump is trying to do is basically to have a kind of a coalition of the willing. At some point, sooner or later, the US would return to the WTO, because the US understand that … to achieve a fundamental re-shift of the rules of the multilateral trading system, you have to go back to the WTO.

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Henry Gao is a professor of law and Lee Kong Chian Fellow at the Yong Pung How School of Law at Singapore Management University.

Suggested citation:

Henry Gao, “Liberation Day in East Asia, One Year Later,” USALI Talking Points, May 8, 2026, https://usali.org/publications/talking-points-liberation-day-in-east-asia-one-year-later.