Will trade collapse? It depends on how the world responds to Trump’s tariffs

After Donald Trump's election victory, global markets and governments are bracing for potentially seismic shifts in international trade. The US president-elect's promises of imposing substantial tariffs – up to 60 per cent on Chinese imports and 10 per cent-20 per cent on those of other nations – have sent shock waves through the international trading system.

This week, Mr Trump said he will impose an extra 10 per cent tariff on goods from China and a tariff of 25 per cent on all products from Mexico and Canada, claiming the additional levies will force the US's neighbours to do more to stop migrants and illegal drugs flowing across the country's borders.

Yet, two weeks since the election, uncertainty reigns.

While specific details about the incoming administration's tariff plans remain unclear, trading partners aren't waiting idly. Australia's Prime Minister Anthony Albanese has already reminded Mr Trump of their bilateral trade surplus and defence ties, while UK politicians have signalled openness to finding common ground.

More assertively, Chinese analysts claim Beijing has prepared countermeasures against potential 60 per cent tariffs, while Canada has established a special cabinet committee to track "critical" bilateral matters. The European Commission has created a task force to work on various war-game scenarios.

The scenarios ahead range from mere threats to full implementation of tariffs, with varying degrees of retaliation possible from trading partners. In considering retaliation, foreign governments must decide whether to target the US specifically or raise barriers across the board. This decision could mean the difference between contained disruption and global trading chaos.

However, the US, despite its economic might, now accounts for only 13.5 per cent of world imports. This often overlooked fact means many nations export larger shares of their goods to other markets, providing them with alternatives should US trade barriers rise. Indeed, current growth trends suggest dozens of countries could recoup lost US exports within a few years through increased trade with other partners.

This indicates a fundamental truth about the coming trade tension: Mr Trump cannot single-handedly bring about a collapse in world trade. That power lies with US trading partners and their chosen responses. While Washington can certainly take a decisive turn inward, the survival of the global trading system depends on how other governments react.

So how will they react?

Several factors might induce more measured responses from foreign governments, especially the strengthening US dollar. Since election day, the greenback has gained significant ground against major currencies and Mr Trump's proposed deregulation and fiscal policies are expected to further strengthen the dollar, which would naturally cushion the impact of any tariff increases on trading partners.

If their currencies weaken relative to the dollar, their exports to the US may remain competitive despite the tariffs. Moreover, Mr Trump’s fiscal plans would likely increase the US federal deficit, reducing national savings and potentially leading to more imports – regardless of tariff levels.

The incoherence between various elements of the new administration's policy agenda might actually provide breathing room for trading partners. Currency movements, which can be influenced by foreign authorities, could blunt the impact of US tariff increases. Additionally, the natural economic consequences of Mr Trump's broader policy agenda might work against his protectionist aims.

Disruption coming

However, the international community should not count on Mr Trump's trade rhetoric proving empty. His first term demonstrated a willingness to disrupt established trade patterns. Foreign governments should carefully consider their response options, remembering that retaliation is not a binary choice between complete acquiescence and all-out trade war.

The worst-case scenario – a spiral of currency devaluations combined with across-the-board tariff increases by major trading nations – remains possible. The weakened state of international economic institutions and the G20's diminished effectiveness offer little restraint should matters deteriorate. Trust between major trading nations has eroded significantly.

Yet pathways to avoid a 1930s-style trade collapse exist. Foreign governments could confine retaliation to the US while maintaining open trade with other partners. They could leverage currency movements to cushion economic impacts. They could even find opportunities in Mr Trump's broader economic agenda that might offset trade restrictions.

For businesses, these scenarios demand careful strategic planning. Companies heavily dependent on US-China trade flows face the greatest risks and may need to accelerate supply-chain diversification. Firms should also look beyond simple tariff impacts to consider currency movements and third-market opportunities. Tariff-jumping foreign direct investment into the US might increase, particularly through mergers and acquisitions rather than new greenfield facilities.

However, if retaliatory trade measures spread globally, internationally active manufacturers may need to adopt broader localisation and regionalisation strategies, fundamentally reshaping their production and sourcing networks.

The relative stability of trade flows with nations not directly targeted by US tariffs could provide a buffer for companies able to pivot their operations.

As the world enters this period of trade uncertainty, the key message is clear: while the new US president may rock the boat of global trade, it is the responses of other nations that will determine whether that boat stays afloat or capsizes.

The future of the world trading system hangs not on decisions made in Washington, but on the calculated responses of capitals around the globe. Corporate boardrooms will find new opportunities in whatever globalisation emerges.

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