Lighthizer: Why the Postwar Trade System Is Breaking — And What Comes Next
Former U.S. Trade Representative Robert Lighthizer argues global trade must pivot from free flow to balanced flow, as rivalry with China hardens and economic security reshapes supply chains
In a wide-ranging December 2025 interview with McKinsey, former U.S. Trade Representative Robert Lighthizer contends that the global trading system built after World War II is no longer fit for purpose. Persistent surplus-and-deficit dynamics, industrial policy distortions, and strategic choke points—especially in the U.S.–China relationship—have undermined the system’s original goals. Lighthizer calls for a shift toward global balance, tougher treatment of transshipment and dual-use technologies, and shorter, regionalized supply chains, arguing that economic security has become inseparable from national security.
A System Built for Balance — Now Producing Imbalance
Robert Lighthizer, who served as U.S. trade representative during President Donald Trump’s first term, begins from a blunt premise: the postwar trade architecture is broken. The system’s architects did not envision a world in which some countries run chronic surpluses while others, notably the United States, carry chronic deficits. Yet that is precisely where global trade has landed.
According to Lighthizer, these imbalances are not accidental outcomes of market forces. They are the result of deliberate policy choices — currency practices, tax regimes, labor rules, environmental standards, and industrial subsidies — that tilt the playing field in favor of surplus countries. When those policies persist for decades, the result is not mutual gain but structural wealth transfer.
This diagnosis frames his skepticism toward incremental fixes. Tariff tweaks or narrow sectoral deals, he suggests, cannot repair a system whose incentives are misaligned at the macro level.
The U.S./China Relationship: Truces, Not Resolution
Lighthizer characterizes U.S./China relations as fundamentally adversarial, likening them to a “second cold war.” In his view, neither side expects convergence. China seeks primacy under a Marxist-Leninist, state-directed model, while the United States and its allies defend a liberal, open economic order.
Against that backdrop, the Trump/Xi meeting on the margins of the Asia–Pacific Economic Cooperation summit produced what Lighthizer calls a truce — not a breakthrough. The goal was tension reduction, not reconciliation. “That’s the most you can hope for,” he argues.
He also warns that U.S. policymakers have been surprised by the extent of China’s leverage over global choke points, particularly in rare earths and other critical inputs. Beijing’s move to require approval for exports containing Chinese rare earths — even between third countries — he describes as an overreach that has accelerated Western resolve to diversify and onshore supply chains.
Strategic Decoupling: Red, Yellow, and Green Lights
Rather than advocating full economic separation, Lighthizer outlines a calibrated approach to engagement with China:
•Red lights: National security, advanced technology, and data. He argues that most technology is dual-use or will become so, citing extreme ultraviolet lithography — once seen as benign, now central to advanced semiconductor manufacturing. Data, essential for training AI models, also belongs in this category.
•Yellow lights: High-level manufacturing. Even industries that appear civilian can be economically and strategically vital, as illustrated by Europe’s auto sector now facing intense competition from Chinese producers.
•Green lights: Agriculture and low-tech manufacturing. China’s need for raw materials and food creates space for mutually beneficial trade — so long as it does not undermine broader economic security.
The central principle, Lighthizer says, is balance: trade should not amount to a systematic transfer of wealth to a strategic rival.
Transshipment and Supply Chains: Closing the Loopholes
Lighthizer draws a sharp distinction between supply-chain resilience and transshipment — the rerouting of goods through third countries to evade tariffs. He points to Vietnam, Thailand, and, to a lesser extent, Mexico as examples where Chinese content can slip “under the radar” into the U.S. market.
New U.S. trade agreements, including provisions reached during President Trump’s visit to Malaysia, aim to impose high tariffs on transshipped Chinese content. Over time, Lighthizer expects such rules to become standard. While technology to verify true origin still needs development, he views the crackdown as unavoidable, especially as China’s exports to the United States fall while exports to U.S.-linked intermediaries rise.
On supply chains, his view is more flexible. Critical inputs should be domestic or sourced from close allies; less critical, low-tech goods can be diversified globally and shifted quickly if disruptions arise.
Europe, the United States, and a Growing Trade Gap
Turning to transatlantic trade, Lighthizer argues that the U.S./EU relationship illustrates the broader imbalance problem. The United States has not run a goods trade surplus with Europe in decades. In 2024 alone, the U.S. goods deficit with the EU reached roughly $235 billion, driven largely by Germany, Ireland, and Italy.
He credits European Commission President Ursula von der Leyen with acknowledging these imbalances rather than retaliating reflexively. Still, Lighthizer maintains that currency dynamics (notably Germany) and tax structures (particularly Ireland) skew outcomes. Italy’s role, he adds, is less easily explained but no less consequential.
Why the WTO Can’t Fix This
Lighthizer is deeply skeptical that the World Trade Organization can address today’s core trade distortions. The WTO, he argues, is ill-equipped to manage non-tariff barriers — labor laws, currency practices, banking regulations, and environmental standards—that reflect how societies organize themselves.
Past efforts to negotiate such barriers, including during the Tokyo and Uruguay rounds, failed because countries can invent new ones as soon as old ones are resolved. For that reason, Lighthizer calls for a system focused on global balance, not bilateral scorekeeping, as the organizing principle of future trade rules.
What to Watch in 2026: Courts, Corridors, and China
Looking ahead, Lighthizer flags several flashpoints:
• A U.S. Supreme Court ruling on presidential tariff authority
• The scheduled review of the United States–Mexico–Canada Agreement (USMCA)
• Whether newly negotiated U.S. trade agreements reduce imbalances or require revision
• Europe’s evolving — and increasingly strained — economic relationship with China
He expects trade policy to remain “kinetic,” with frequent adjustments as governments attempt to reindustrialize and correct deficits. Crucially, he emphasizes that most imbalances stem from industrial policy, not comparative advantage — necessitating active government countermeasures.
Advice to Boards: Manufacture Near the Customer
For corporate leaders navigating this volatility, Lighthizer’s guidance is straightforward. To minimize exposure to trade friction, manufacture close to end consumers. Shorter, less complex supply chains reduce regulatory risk and geopolitical vulnerability. Diversification — producing in multiple regions rather than one global hub — is the other essential “no-regrets” move.
How Lighthizer Stays Informed
Finally, Lighthizer underscores the importance of disciplined information intake. He relies on the Wall Street Journal, Financial Times, The Economist, and Inside U.S. Trade, along with analysts such as Michael Pettis and Brad Setser. On China, he cites Substack publications like Bill Bishop’s Sinocism and Matt Turpin’s China Articles, as well as research from the Rhodium Group.
Bottom Line: Lighthizer’s message is not a rejection of trade, but a demand that it be re-engineered around balance, resilience, and security. In his telling, the era of assuming globalization will self-correct is over — and the next phase of global trade will be shaped as much by geopolitics as by prices.
