Robert Lighthizer, a lawyer who served as US trade representative during the first Trump administration, believes that the international trading system constructed after World War II is broken. Some nations run persistent surpluses while others run persistent deficits, which wasn’t the intent of the system’s creators. In a conversation with McKinsey Partner Ziad Haider, Lighthizer shares his views on potential trade reforms, the tensions between the United States and China, the threats to Western manufacturing, and how companies can make their supply chains more resilient.
The following transcript has been edited for clarity and length.
A ‘truce’ between China and the United States
Ziad Haider: Let’s start with the US–China relationship. There was an important meeting recently between Presidents Trump and Xi on the sidelines of the Asia–Pacific Economic Cooperation summit. We saw what some would call an uneasy truce in the long-running trade dispute. What do you think of the deal they reached, and what should business leaders be watching for in the aftermath of that meeting?
Robert Lighthizer: My view is that China and the United States are both trying to achieve the same thing. China expects to be number one in the world, which it thinks is its rightful place, and the United States feels the same way about itself and the Western system in general. There’s an adversarial relationship between the two countries, and I believe we’re now in a second cold war. The important thing is to keep it a cold war.
I don’t believe an agreement can resolve the two countries’ fundamental differences. On the one hand, you have a Marxist Leninist totalitarian government that wants to impose a new system on the world. On the other hand, you have the West’s liberal democratic, fairly open economic system. What you will have are truces, and that’s what this was. It reduced tension, which is the most you can hope for.
In general, I think the US administration has been taken aback by the extent of the choke points China created over the years. I also think China made a mistake by imposing a new system requiring its approval to export products containing Chinese rare earth minerals between third-party countries. It was an overreach. It’s up to the West now to ensure we eliminate as many of these choke points as possible. China, of course, is doing the same. Since at least 2006, the government has been trying to reduce the country’s dependence on Western technology.
Red, yellow, and green lights of China engagement
Ziad Haider: You talked in the past about the United States’ “strategic decoupling” from China. To use a traffic light analogy, where do you see red lights for companies that still operate in China—areas where they can no longer engage? What about yellow-light areas, where they can proceed with caution? And, since you’re not calling for a full decoupling, are there areas where you would give a green light?
Robert Lighthizer: We ought to have trade, but it ought to be balanced. We shouldn’t be transferring wealth to China. I also think the US government should regulate investment in a way that benefits the West or the United States.
In terms of red lights, I believe that includes anything involving national security. But I would go a step further and add anything involving technology, because an extremely high percentage of all technology is dual use [military and civilian] or will become so. It’s not always possible to predict which technological advances may have future military applications. That was demonstrated during the George W. Bush administration. President Bush didn’t view extreme ultraviolet lithography as a technology that warranted protection. Now we know that it’s absolutely fundamental to the production of advanced chips. I would also include data in the red-light category because it’s so important for training AI models.
In terms of yellow lights, I would say high-level manufacturing. In green lights, I’d include agriculture and low-tech manufacturing. Obviously, China needs raw materials and agriculture, and letting the country supply low-tech materials to the West is a good idea. But you need to think in terms of the national security implications as well as the broader economic implications.
A good example of the latter is how Europe’s automobile industry finds itself under assault from China. Chinese car companies are starting to take over the European market. [Nonelectric] automobiles have high-tech elements, but generally they’re not high tech. Yet, they’re so fundamental to the European economy that if it loses that industry—or if the United States lost it—it would be a catastrophe. As recently as five years ago, most industry experts thought it impossible for Chinese imports of European cars to decline, yet Chinese car companies are now taking over their domestic market. While economic security has to be protected, there’s an element of national security involved as well.
Reforming the global trade system
Ziad Haider: I’m based in Singapore, which lies in a region that has played a key connective role between the United States and China. One major regional question concerns the Trump administration’s expectations around reduced reliance on Chinese supply chains. For example, the trade agreement reached when the US president was in Malaysia included economic security provisions vis-à-vis China. How do you view these efforts?
Robert Lighthizer: I think about them in two ways. One is in terms of supply chains, and the other in terms of transshipment, the routing of goods through third-party countries to avoid higher tariffs.
If you look at Vietnam, Thailand, and to some extent Mexico, you will find some imports from China exported under the radar to the United States to avoid higher tariffs. One provision agreed to in Malaysia—which I think will become universal before too long—is that transshipped Chinese content must face a high tariff. The technology to determine the true origin of goods will need to be developed in the future, but the need to stop transshipment is clear in my view. This focus is also timely because, while China’s exports to the United States are declining, its exports to countries that ship to the United States are rising.
The supply chain question is a little different. Critical supply chains ought to be domestic or with close allies, and I think you will see movement in that direction. The less critical supplies, which are often low tech, can be sourced from a variety of places and moved quickly if a choke point is created, so they are less of a problem.
Ziad Haider: In August, the United States and the European Union signed an agreement on reciprocal, fair, balanced trade, but issues remain around tariffs, nontariff barriers, and digital services. How do you view the US–EU trade situation?
Robert Lighthizer: The view from the United States is that the trading system has gotten widely out of balance. You have countries with trillion-dollar trade surpluses, while other countries, including the United States, have equally large trade deficits. Some countries always have surpluses and others always have deficits. The system wasn’t designed to work this way. I think that European Commission President Ursula von der Leyen was very clever about the way she approached the situation. Instead of retaliating, she acknowledged these imbalances. There will always be issues, but some could be worked out within the agreed-upon framework.
The problem for the United States is that our trade deficit with Europe keeps increasing. It’s been decades since we ran a trade surplus with Europe. We had a roughly $235 billion deficit in goods trade with the European Union in 2024, and Germany, Ireland, and Italy account for almost all of it. Our problem is really with parts of Europe, and we know the reasons: It largely relates to currency with respect to Germany and the tax system with respect to Ireland. The reason for Italy is a little harder to figure out.
Ziad Haider: What do you think about the new trade corridors that are emerging? Are there any that you are keeping an eye on?
Robert Lighthizer: First, I think you will see companies try to adapt within their own trade corridors rather than making wild changes. The United States is likely to operate within its own hemisphere—Mexico is one of the transshipment concerns, but the Mexican government seems to understand this. The trade patterns at risk are the ones that lead to imbalances. That is obviously trade with China and other parts of Asia.
The issues with the World Trade Organization [WTO] is that it doesn’t—and probably can’t—deal with nontariff barriers, such as labor laws, currency manipulation, banking laws, and environmental regulations or lack thereof. These barriers are a reflection of how you organize your society. China and some other countries are organized in a way that will always produce a trade surplus. In past WTO negotiations on tariffs, when we got the Tokyo and Uruguay rounds, we tried to get into nontariff barriers. But I think it was a mistake to think you could negotiate them, because countries can come up with new ones the minute you’ve resolved an old one.
I believe we need a system based on global balance, not bilateral balance, which wouldn’t work. That’s likely to be the direction that global trade moves in, rather than small issues.
Global trade watchlist for 2026
Ziad Haider: Looking ahead, we have a US Supreme Court ruling on the president’s ability to impose tariffs and the United States–Mexico–Canada Agreement [USMCA] coming up for review and adjustment. What other issues on the trade front should we keep an eye on in the year ahead?
Robert Lighthizer: Those two are big. Another is the US attempt to reindustrialize, create more revenue, and get the trade balance right. I believe we will see similar initiatives in Europe because Europe will have to deal with large deficits in much the same way we have to.
The first thing to watch is how all these trade agreements the United States recently negotiated are working. Are they helping to create a balance? If they’re creating problems, there will have to be adjustments. I believe this area will be kinetic for the foreseeable future. As for the investment commitments in these agreements, my guess is that you won’t see as much actual investment as the agreements indicate, but there will be a significant amount.
Another issue to keep an eye on is Europe’s relationship with China. It has reached an inflection point. It’s changed from being one that was massively favorable to Europe to one that’s heading in the direction of being very unfavorable to Europe, and I don’t think Europe can tolerate that.
It’s also worth reminding ourselves that most of these imbalances are not the result of fundamental economics but of industrial policy. That makes a huge difference. If it were fundamental economics, you would take one series of approaches. When it’s industrial policy, you need government measures that neutralize the unfair advantage other countries have created.
Ziad Haider: You counsel boards and management teams today. What no-regrets moves would you recommend to boards them to navigate the geoeconomic volatility?
Robert Lighthizer: I’ll answer that as President Trump would: If you want to avoid trade regulations affecting your business, then you should manufacture close to your consumer base. That’s simple, and I think you will see more manufacturing closer to consumption and shorter and less complex supply chains. I also think companies will diversify their manufacturing, so instead of manufacturing for the entire world from one location, they will manufacture in different places.
Ziad Haider: Making sense of trade has become part of almost every business leader’s job. As you strive to stay on top of these issues, what do you read or listen to as a way to make sense of developments playing out at such a rapid pace?
Robert Lighthizer: I read The Wall Street Journal, the Financial Times, and The Economist. I also subscribe to the specialty publication Inside U.S. Trade. On social media, I follow a number of very smart people who focus on trade, including [American economists] Michael Pettis and Brad Setser. Some experts on China offer excellent services on Substack. [American journalist] Bill Bishop has one called Sinocism, and [former member of the US National Security Council] Matt Turpin has one called China Articles. The Rhodium Group also offers an enormous amount of insights. My guess is that over time, someone will come up with a publication or service that covers all the relevant topics, but I don’t think it exists right now.
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