At 4pm on April 2nd, in the White House Rose Garden, President Donald Trump is poised to announce the most sweeping escalation of his trade war yet. Details remain uncertain, but the measures might include steep “reciprocal” duties on countries that run large bilateral trade surpluses with America, including allies such as Canada, the EU and Japan. Non-tariff barriers, from value-added taxes to food-safety rules, could also be targeted, although universal tariffs, on all countries, have not been ruled out. Whatever form they take, the policies will probably represent the most aggressive American trade action in nearly a century.

Leaders around the world are preparing their response. On April 1st Ursula von der Leyen, president of the European Commission, told the European Parliament that the bloc stood ready to retaliate—this time targeting American services exports, including those from big tech firms. Japan has warned that “all options are on the table”. Some governments are even weighing co-ordinated reprisals. A mighty trade war looks set to begin.

Mr Trump’s move will confirm America’s abdication as guardian of the global trade system. It is a role that began after the second world war, when America emerged as the chief overseer of open markets, and reached a high point in 1995 with the creation of the World Trade Organisation (WTO). China rose within the system, paying lip service to the rules after joining in 2001, even as it flouted many. It has long been accused of distorting the global trade system with vast subsidies and cut-rate loans from state banks for favoured industries. Now America’s tariffs wilfully violate the core principle of non-discrimination as enshrined in Article I of the WTO’s founding treaty. As a result, countries and trade blocs caught in the middle are no longer trying to salvage the old order. Instead, they are building a new one that is less reliant on American demand and better protected from Chinese overcapacity.

Avant le déluge

Can this deepening of the rest of the world’s trade relations survive the ructions to come? And could China even be brought into the emerging architecture? Canada and the EU have already announced retaliatory tariffs—worth tens of billions of dollars—in response to Mr Trump’s aluminium and steel duties of 25% that were implemented on March 12th. The pair claim the measures are “safeguards”, allowed under WTO regulations for limited retaliation. It is a sleight of hand, but with the WTO’s appellate body defunct, there is no one to rule, and so governments proceed as if their interpretation holds. Much the same pattern is likely to emerge with Mr Trump’s latest tariffs.

China faces blowback, too. Last year it was the focus of 198 investigations into dumping or subsidies—double the previous year’s tally and nearly half of all cases reported to the WTO, according to Lu Feng of Peking University. Emerging markets led the charge, including 37 probes by India, 19 by Brazil and nine by Turkey. With WTO enforcement paralysed, many are also acting unilaterally. India has imposed duties on Chinese industrial equipment and is considering duties on its steel. Brazil has slapped anti-dumping tariffs on Chinese iron, steel and fibre-optic cables. The Gulf Co-operation Council has imposed duties of up to 42% on Chinese electrical parts, and Indonesia is considering a 200% tariff on Chinese textiles and garments. Whereas such action was once a last resort within a legal framework, it is now being exercised unilaterally, even by China’s close trading partners.

Countries are also diversifying trading partners, forging new alliances and building a new rule-making architecture. This has been made newly feasible by a decline in America’s and China’s share of global trade. At the start of the 21st century, America accounted for a fifth of global imports; today it makes up just an eighth. Its role as a consumer has also shrunk: the proportion of global value-added trade tied to American final demand fell from 22% in 2000 to 15% in 2020, the most recent year for which data exist. This reflects not only the rise of emerging markets and regional supply chains, but also changes in America’s economy. As services have grown, demand for imported goods has stabilised. Although China’s import share has risen, its market is forbiddingly competitive. Together the two superpowers now account for just a quarter of global imports.

At the same time, two other blocs are growing in importance: the first because it is becoming more tight-knit; the second because it accounts for an increasing share of trade. “Open-market allies” form a loosely aligned group committed to legal predictability, free commerce and diversified trade. At its core is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which links Australia, Canada, Chile, Japan, Mexico and others across the Pacific Rim. The group also includes Norway, South Korea and Switzerland. Together these economies absorb 22% of the world’s imports. Add in the European Union, which is responsible for another 12%, and the allies collectively account for over a third of global import demand—far more than America and China combined.

This group began to hedge against American protectionism in Mr Trump’s first term. Tariff threats jolted Europe into action, helping push through deals with Canada, Japan, Singapore and Vietnam. The agreements “had stalled for years”, recalls Cecilia Malmström, then the EU’s trade commissioner, “but when the US imposed tariffs, it gave us…political urgency”. At the same time, Canada appointed a minister for trade diversification and launched an export strategy seeking, by 2025, to boost overseas investment by 50%. Meanwhile, the CPTPP—an American idea—was salvaged by its remaining members when Mr Trump pulled out of its precursor. It came into force in 2018, eliminating most tariffs among 11 countries, including Australia, Canada, Japan, Mexico and Vietnam. Britain formally acceded last year, making the pact a 12-member group that accounts for around 15% of global GDP.

The second bloc might be called the “strategic hedgers”. It includes large, fast-growing economies such as Brazil, India, Indonesia, South Africa and Turkey, which depend both on American demand and Chinese capital, and are wary of aligning with either country. Their trade strategy is pragmatic. Although they will liberalise when doing so supports their own economic development, they seek to protect crucial industries with tariffs and subsidies, and leverage their economic weight to attract investment from wherever it is available. Collectively, they account for more than 15% of global imports.

Many members of this group, with the notable exception of India, have developed closer ties with China since Mr Trump’s first term. Brazil welcomed cheap Chinese goods—including electronics and electric vehicles—while shipping back soyabeans and iron ore. Indonesia absorbed a glut of Chinese machinery and textiles, while supplying coal, nickel and ferroalloys. Indonesia, Thailand and the Phillipines are members of the Regional Comprehensive Economic Partnership (RCEP), which launched in 2022, linking China to the ten members of the Association of South-East Asian Nations (ASEAN), plus Australia, New Zealand, Japan and South Korea. Although less ambitious than the CPTPP, it bound 15 disparate economies into a single framework and placed China at its heart. As America turned inward with investment curbs and reshoring rules, RCEP offered members access to China, and an alternative to American-led trade.

Talking terms

Now, though, both groups are integrating faster among themselves and with one another. Since Mr Trump’s election, the EU has updated deals with Chile and Mexico, reopened negotiations with Malaysia and is expediting talks with the Philippines, Thailand and the United Arab Emirates. Negotiations with Indonesia and India are also moving forward, with a target to complete a “commercially meaningful” agreement with India by the year’s end. The clearest sign of Europe’s urgency is its revived deal with Mercosur, a South American bloc including Brazil and Argentina. After 25 years of delay, it was at last sealed in December, owing, officials say, to Mr Trump’s return. The deal will create a combined market of over 700m consumers and streamline trade in cars, machinery and services. Although powerful countries such as France and Poland remain opposed, Mr Trump’s tariffs are expected to push the deal over the line this summer.

Canada is moving fast, too. Since its trade-diversification push began eight years ago, it has signed 16 deals, including a recent one with Ecuador. Canada also recently began trade talks with the Philippines, finalised a partnership with Indonesia and is negotiating with the ten ASEAN countries. Mark Carney, the country’s new prime minister, wants closer ties with partners that “share our values”, including Britain, the EU and certain Asian economies.

Meanwhile, strategic hedgers are scrambling to shield their markets from a rising tide of Chinese exports—already surging and likely to worsen as America raises its own barriers. Rather than turning inwards, many are trying to diversify. Piyush Goyal, India’s commerce minister, has urged exporters to shed their “protectionist mindset” by competing “from a position of strength”. His country has restarted talks with Britain, Chile and the EU, and is edging towards a deal with America. Indonesia has signed a deal with Turkey and has formally applied to join the CPTPP. Brazil has begun discussions with Mexico, Japan and Vietnam, and recently concluded a deal with the EU. These agreements may be less deep than the sort preferred by open-market allies; they nevertheless point in the right direction.

Moreover, as America retreats, other countries are stepping up. They hope to shape a fragmented trade order via initiatives at the WTO, regional agreements and bilateral deals. In time, they want to build an entirely new global-trade architecture.

Although weakened, the WTO remains important, especially for smaller countries that lack economic clout. Its rules still underpin roughly four-fifths of global trade. To bypass America’s blockade of the dispute-arbitration system, the EU and 16 other countries, including China, have set up an alternative body. More than 90 WTO members are negotiating rules for e-commerce; another group is pursuing an investment pact. Most members agree on the need for organisational reform, but few want to abandon the WTO altogether. Even America may yet be persuaded of its merits. Ngozi Okonjo-Iweala, the WTO’s director-general, recently talked to Jamieson Greer and Howard Lutnick, two trade bigwigs in the Trump administration, about the possibility of renegotiating tariffs within WTO rules. Both are said to have shown interest. (It remains to be seen whether America’s biggest bigwig shows any interest.)

Organisational reform will be grindingly slow. In the meantime, though, rules are being set through regional deals, especially in Asia. The CPTPP has taken the lead, establishing restrictions on state-owned firms, digital trade, and environmental and labour conditions. Its open-accession clause has attracted a queue: China, Costa Rica, Ecuador, Indonesia, Taiwan, Ukraine and Uruguay have all applied to join. RCEP offers less depth but greater breadth, making it attractive to economies from the global south that would like to tap into Asia’s growth. New sectoral agreements, including the Digital Economy Partnership Agreement (DEPA, signed by Chile, New Zealand, Singapore and South Korea) and the Agreement on Climate Change, Trade and Sustainability (ACCTS, signed by Costa Rica, Iceland, New Zealand and Switzerland), are setting rules on data flows and fossil-fuel subsidies. China has even applied to join DEPA.

Although some European officials would like the EU to join the CPTPP, that remains unlikely. It is, after all, an agreement designed by America, with its looser regulatory standards in mind. Instead, the EU is focusing on bilateral agreements. It has established free-trade deals with nearly all CPTPP members and is pursuing what officials call “structured co-operation”, which involves crafting new rules on digital trade, green standards and supply chains—all areas that do not tend to feature in conventional trade agreements. In March the EU and South Korea concluded negotiations for a landmark Digital Trade Agreement on cross-border data flows, privacy and personal-data protection. The hope, in time, is to turn one-on-one deals into regional pacts.

Red-letter day

A fragmented trading order is taking shape, therefore, driven not by America or China, but by everyone else. Coalitions are forming where interests align, allowing rules to advance in the absence of global consensus. History suggests that such patchwork arrangements can succeed. After the second world war the original General Agreement on Tariffs and Trade started with only 23 countries. It took half a century to mature into the WTO.

But as America raises the barricades, China may spy an opportunity. Some countries will strengthen trade ties with the Asian superpower owing to more difficult relations with America. Brazil, for example, is ramping up beef and soyabean exports to China. Others see the Indo-Pacific as the future of trade and want to become deeply integrated into China’s supply chains. Chile, Hong Kong and Sri Lanka have formally applied to join RCEP, and Bangladesh is considering doing so for this reason. Separately, Australia and Chile are eager to continue to supply China’s clean-tech boom with the requisite metals, and are no longer so worried about alienating America. Still others have been burned by Uncle Sam and may revert to older trade alliances. South Korea, having reoriented exports towards America and away from China, now finds its free-trade agreement with America under threat.

Meanwhile, China is pushing for more influence. It has applied to join the CPTPP and DEPA, and is courting Mercosur. Most CPTPP countries already do more trade with China than America. Australia, Chile and Peru each send over 30% of their exports to China, their largest and fastest-growing market. China wants to expand RCEP and the reach of the Asian Infrastructure Investment Bank, and already plays an important role in some of the WTO’s recent agreements. Other countries, including some rules-based allies of America, now appear more willing to strike a deal with China as a result of Mr Trump’s tariffs. On March 30th Japan and South Korea resumed trade talks with China—on pause for five years—in a shift from Mr Trump’s first term, when Japan, the EU and America united to confront Chinese trade distortions. On April 1st China’s ambassador to India said that China was open to importing more goods from its one-time foe.

Will a rules-based order, steered by open-market allies, emerge? Or will the world follow China’s lead in bending the rules to suit its own ends? Much may hinge on what Europe does next. The EU and its open-market allies could form a formidable bloc—co-ordinating responses to American tariffs and pulling China in a more free-trading direction. “The door is open” to deeper ties with China, says a European official, “if it does things in a more balanced way”. That means curbing subsidies, reining in state-owned firms and levelling the playing-field, something China has so far shown little interest in doing. Even without China, however, the open-market bloc is big enough to rebuild a trade order from the wreckage of Mr Trump’s war. This may be a dark time for free-traders, but there are glimmers of hope. ■

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