U.S. and China Locked in a ‘Mutual Embargo’ That Trump Won’t Win, Says Former WTO Chief

Former World Trade Organization (WTO) Director-General Pascal Lamy has described the ongoing trade conflict between the United States and China as evolving into a de facto “mutual embargo.” According to Lamy, the escalation of tit-for-tat tariffs by both nations has effectively cut off trade between the world’s two largest economies, and this deadlock can only be resolved through direct, face-to-face negotiations between their leaders. Lamy emphasized that while China attempts to adjust to this situation, it must focus on bolstering domestic demand and shifting its growth strategy more toward internal consumption, a reform it has yet to successfully implement. He also warned that other countries are concerned about Chinese overcapacity and the potential redirection of exports formerly destined for the U.S. [para. 1][para. 2]

The latest round of tariffs includes a punitive 145% U.S. tariff on all Chinese imports, with China retaliating by imposing a 125% levy on U.S. goods. Both nations are coping with the negative consequences of this confrontation, even as then-President Trump maintained optimism about reaching an agreement within four weeks. Lamy forecasted that higher-level negotiations covering not only trade but also technology and issues such as Ukraine will eventually be necessary to break the impasse. [para. 3][para. 4]

Given the current scope of the tariffs, Lamy said the system resembles a mutual embargo. He pointed out that China’s domestic market is not large enough to absorb all the goods once exported to the U.S., underscoring the importance of increasing domestic consumption. When asked if China could redirect its exports to Europe, Lamy expressed skepticism, explaining that the European Union demands different types of goods than those shipped to the U.S., so substitution is not straightforward. [para. 5][para. 6]

Lamy criticized Trump’s strategy of using tariffs to solve the U.S. trade deficit, arguing such measures instead fuel inflation and slow domestic economic growth. He observed that the U.S. bond market has responded negatively to these developments, with rising Treasury yields prompting Trump to temporarily suspend high tariffs for most countries except China. [para. 7]

He described Trump’s trade approach as having divided the world into two groups: smaller countries unable to retaliate and larger economies like the European Union, China, and India, which can mount a counter-response or negotiate. The EU has expressed willingness to engage in negotiations but only under fair and mutually beneficial conditions. If a win-win solution cannot be reached, Lamy noted, the EU may retaliate by targeting U.S. goods and services with tariffs to increase pressure on the U.S. economy. [para. 8][para. 9][para. 10][para. 11]

Lamy compared the present situation to prior episodes in U.S. history, like the McKinley Tariff Act and the Smoot-Hawley Tariff Act, noting a persistent isolationist tendency. He asserted it is illogical to attempt isolating such a large economy from the world, but recognized that is what current policy resembles. [para. 12][para. 13]

With the WTO Appellate Body unable to function due to U.S. obstruction of new appointments, Lamy said the organization needs to adapt to a world where the U.S. is less involved. The EU has responded by creating an alternative dispute settlement mechanism. Lamy called for more comprehensive WTO reforms regarding subsidies, digital trade, and enhanced leadership, noting the U.S. represents 13% of global imports, while the rest of the world should not let its actions undermine the multilateral trading system. [para. 14][para. 15][para. 16][para. 17][para. 18]