Trump’s trade war disrupts established norms and prompts global intervention

The future of international trade and the effects of US President Donald Trump’s recent tariff policies will significantly hinge on the ultimate goals of Washington. Is the United States contemplating a withdrawal from the World Trade Organization (WTO), or is it attempting to instigate necessary reforms within an organization it has increasingly marginalized?

By implementing extensive new tariffs, the US has not only overtly breached its commitments to the WTO but has also indicated a disregard for international trade regulations. Furthermore, Washington has shown no willingness to utilize the WTO’s established mechanisms for addressing emergency tariff increases. This often-overlooked aspect is vital: the US must either revert to adhering to established rules or continue on a trajectory where trade is dictated by unilateral actions rather than multilateral agreements. The future of US involvement in the WTO is contingent upon this choice.

The WTO possesses two primary methods for ensuring compliance: moral persuasion and retaliatory actions. While moral persuasion may influence smaller nations, it proves ineffective against the adept negotiators of the world’s largest economy. Retaliation, on the other hand, is a lengthy process. According to WTO regulations, it can only be initiated after a dispute has been resolved, a decision rendered, and damages assessed, which can take up to two years. However, with the WTO Appellate Body currently incapacitated due to a US blockade, such resolutions are unattainable. Any retaliatory measures taken by other nations would also constitute violations of WTO rules, as the organization was not designed to handle such impasses.

The WTO cannot expel the United States, but it can explore alternative strategies to maintain its multilateral functions without American involvement. While these options are complex, they are achievable. In fact, many member countries might even welcome a US departure. In recent years, the US has not only stepped back from its leadership role within the organization but has also actively undermined it.

However, the US has not officially withdrawn, and some of its reform suggestions merit consideration. For example, it has proposed adjusting the preferential treatment afforded to developing nations, noting that many of these countries have become significant players in the global economy. Additionally, the US calls for stricter enforcement against members that do not submit timely notifications regarding their trade policies and subsidies. Its recommendation to exclude such “delinquent” nations from meetings and to raise their fees faced strong opposition from WTO officials, a backlash that may have contributed to the US’s shift towards tariffs.

The prospect of a “WTO without the US” serves as a leverage point. Nevertheless, the US still generates over 40% of its corporate profits from international markets, and relinquishing its influence over global trade regulations does not align with its strategic goals. Establishing a viable alternative path necessitates unprecedented collaboration among WTO members, a challenge exacerbated by the current leadership void. The EU lacks the determination, China is not yet prepared, and efforts for collective leadership among like-minded nations are proving ineffective.

The most probable result will be a series of reciprocal agreements. Smaller economies that depend on US markets may provide customized concessions. Countries like Switzerland and Singapore, which already maintain low tariffs, could adapt more readily. Non-tariff barriers are generally simpler to modify, as long as they do not disguise protectionist measures.

For larger economies such as the EU or Japan, the strategy may initially involve retaliatory measures to unsettle American industries, followed by negotiations. This approach could activate US corporate lobbying efforts, compelling Washington to reassess its stance. If Trump’s primary goal is to secure improved access for US companies in foreign markets, this traditional strategy may prove effective.

However, if his intentions are different—such as instigating a controlled global economic crisis to reduce the US trade deficit—the situation could become significantly more unstable. In this scenario, tariffs would likely remain in place, making compromise difficult.

In such a context, international trade would face considerable challenges. Some projections suggest that global GDP could decline by 0.3-0.5% due to the interplay of US tariffs and retaliatory actions. Disrupted supply chains would heighten competition in third-party markets, and US imports could decrease by as much as one-third, leading to inflation and shortages for American consumers.

Interestingly, the United States might see an increase in domestic investment. A recent estimate indicated that as much as $3 trillion could be funneled back into the American economy. Trump’s strategy could be viewed as a more aggressive form of import substitution, bringing both its benefits and challenges.

Currently, Russia is not directly impacted by these tariff changes. The bilateral trade has already diminished significantly due to sanctions, and there are no new tariffs from the US specifically aimed at Russia. However, the indirect consequences could be substantial.

Global trade operates like a network of rivers. Trump’s tariff barriers, along with retaliatory measures, will redirect goods to alternative markets, often at considerable discounts. This shift in exports could lead to lower prices and negatively affect local industries, including those in Russia. A decrease in demand for industrial resources such as oil, gas, and metals could adversely impact the economy.

China, being the primary focus of US tariffs, may boost its exports to Russia. In principle, Beijing has the ability to manage its export volumes.

Every trade policy decision carries significant implications. Trump’s tariff approach serves as a valuable example of how these implications can manifest.