there may be silver linings in the trade war storm clouds
- Written by Scott Mahadeo, Senior Lecturer in Macroeconomics, University of Portsmouth
US tariffs – both threatened and imposed – on trade partners including China, Canada, Mexico and the EU quickly set off waves of retaliatory measures. The latest commodities in the sights of president Donald Trump are steel and aluminium – with tariffs of 25%[1] announced for all imports. But not only do these taxes disrupt well-established trade flows, they ignite concerns over the very future of globalisation.
Yet amid this uncertainty, it’s possible that there may be a silver lining. Trump may inadvertently be paving the way for a realignment of trade relationships and the emergence of new economic blocs. Such partnerships could foster more resilient and regionally focused economic cooperation.
Trump’s decision to levy tariffs on its major trading partners disrupts the fundamental tenets of the gravity model of trade[2]. According to this theory, trade between two nations is largely determined by their economic size and proximity. For instance, introducing tariffs to the close economic relationship between the US and Canada, underpinned by their shared border, effectively increases the distance between the two by raising costs and reducing the volume of bilateral trade.
However, these disruptions can inadvertently encourage diversification of trade relationships. As companies and governments seek to mitigate the risks associated with tariffs, they may begin to explore new markets and alternative supply chains. This could ultimately lead to a more dispersed and – potentially – more stable global trade system.
Yet as Trump continues to test the limits of his power, he is learning it is not so easy to defy gravity. Already, the president has dialled down tariffs on Canada[3] and Mexico[4], while China has struck back[5] with retaliatory measures.
One positive spin-off of the trade war may be the reinforcement of regional alliances. With traditional trade flows disrupted, countries are increasingly incentivised to strengthen ties with neighbouring economies.
North American outlook
Canada and Mexico, long considered natural trading partners of the US, might pivot towards deepening their economic cooperation. They may also look to bilateral agreements with other partners as well as seeking new markets, strengthening ties with China and Japan.
The USMCA[6] (United States-Mexico-Canada Agreement) provides a strong foundation for trade. But attempts to dismantle this arrangement could see Canada and Mexico accelerating efforts to build closer economic ties with other regions, reducing their exposure to the US market.
Trump reveals his plans for sweeping steel tariffs on “everybody”.Trump’s planned tariffs on steel[7] threaten to undermine the USMCA. After all, it is designed to foster integrated supply chains and low-tariff economic cooperation among the three countries. This is likely to escalate trade tensions across the bloc, forcing a reassessment of the trade agreement’s key terms and destabilising the established relationships.
European Union outlook
The imposition of tariffs on the EU could lead to deepening integration among its member states. Faced with new pressures from the US, the EU might accelerate initiatives aimed at consolidating internal trade, harmonising regulations and promoting intra-European supply chains.
Member states, with France at the forefront, are already advocating for a united response to counteract US protectionism[8]. They hope to signal a strong political commitment to resist the pressures from Trump.
Asia-Pacific outlook
China, as the world’s second-largest economy[9] behind the US, may seek to expand its trade relationships in the Asia-Pacific region and beyond. As China’s economic growth model is export-led[10], it may seek stronger partnerships with regional players and invest in new trade agreements. This could potentially give rise to an even more integrated Asian economic community.
A new economic order
Whatever else plays out, these tariff wars signal a reordering of the global economic landscape. Such disruptions, though painful in the short term, can create long-term changes that rebalance economic systems. The natural trading partner hypothesis[11] reinforces this view by highlighting how countries with shared cultural, historical and geographical ties are likely to deepen their economic relationships in the face of external shocks.
Table of US trade
In this new order, traditional superpowers may find themselves challenged by unified responses from other nations. By imposing tariffs, the US risks isolating itself from these emerging alliances, while its major trading partners may become united in their efforts to counterbalance rising American protectionism.
Read more: Brics: growth of China-led bloc raises questions about a rapidly shifting world order[13]
The ripple effects of the US tariff row extend well beyond the directly involved countries, with significant implications for global trade networks. For the UK, already coping with the aftermath of Brexit, this new environment offers both challenges and opportunities.
With US-led protectionism disrupting traditional trade channels, the UK could seize the opportunity to diversify its export markets by forging stronger ties with the EU and digging deeper into its Commonwealth alliances. It could reinforce its position as a hub for international commerce while continuing to cultivate its relationship with the US. Managing Trump[14] is a delicate balancing act for prime minister Keir Starmer, as both are expected to be in office for four years.
A word of caution – negotiating international trade agreements is a complex and lengthy process. This is the hard lesson learned by the UK. Its trade with the EU (its most important commercial partner) shrank after Brexit[15], driving the quest for new trading partners and agreements. But these fruits are slow to materialise.
The UK formally requested accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in February 2021, but only signed the accession protocol in July 2023[16].
And we should not forget that in 2024 the UK halted its trade talks with Canada[17] after two years of negotiations, due to disagreements over the standards on some agricultural products.
Tariffs come with challenges, but they might also be the beginning of a slow and painful change towards a more balanced and robust global economic order.
References
- ^ tariffs of 25% (www.theguardian.com)
- ^ gravity model of trade (www.nber.org)
- ^ on Canada (news.sky.com)
- ^ Mexico (www.bbc.co.uk)
- ^ China has struck back (www.independent.co.uk)
- ^ USMCA (ustr.gov)
- ^ steel (www.bbc.co.uk)
- ^ counteract US protectionism (www.politico.eu)
- ^ second-largest economy (www.imf.org)
- ^ export-led (www.elibrary.imf.org)
- ^ natural trading partner hypothesis (documents.worldbank.org)
- ^ Author provided (www.census.gov)
- ^ Brics: growth of China-led bloc raises questions about a rapidly shifting world order (theconversation.com)
- ^ Managing Trump (theconversation.com)
- ^ shrank after Brexit (commonslibrary.parliament.uk)
- ^ July 2023 (www.dfat.gov.au)
- ^ trade talks with Canada (www.bbc.co.uk)
