The Crisis of International Trade: Tariffs

The polarization in international trade is deepening. The concept of "friendshoring," which emerged in supply chains during the COVID-19 crisis, no longer includes the U.S. Friendshoring means developing trade relations with "friendly" countries to avoid supply chain disruptions due to rising geopolitical tensions.

The U.S., once an ally of the European Union (EU), is no longer seen as a "friend" after Trump's administration described EU trade practices as "an atrocity."

The U.S. announcement of a 25% tariff on imports from Canada and Mexico, and an "additional 10%" tariff on Chinese imports, poses a serious challenge to a "globalized" world economy. Tariffs on EU imports also appear imminent.

The U.S. will impose a 10% tariff on crude oil imported from Canada instead of 25%, as Canada accounts for 60% of U.S. crude oil imports.

Canada was quick to respond to the U.S. tariffs, applying tariffs on U.S. products worth $107 billion in trade volume. Mexico stated that it would resort to non-tariff barriers in addition to tariffs if no compromise is reached. However, at the time of writing, it was announced that the implementation of the tariffs had been postponed by a month.

The first two effects of widespread tariffs are a contraction in international trade volume and inflation. This will be followed by slowdowns or crises in sectors affected by the shrinking trade volume. These chain reactions will lower global growth rates. Some countries, especially Canada and Mexico, face the possibility of recession since the U.S. accounts for 80% of their export markets.

China’s 2024 foreign trade surplus reached $1 trillion. While this figure represents a success for China, it also signals some risks and challenges. China is trying to overcome its domestic economic difficulties through exports. One reason for the record trade surplus is the internal economic troubles it faces.

China’s trade surplus reflects the country’s extensive presence in global manufacturing. Therefore, if the U.S.’s additional 10% tariffs significantly affect Chinese companies, industries in other countries that rely on Chinese-manufactured goods may experience supply chain disruptions. Indeed, Chinese manufacturing firms recorded three consecutive years of declining profitability by the end of 2024, with a significant increase in the number of loss-making companies.

Given China’s global scale, any stumble it faces will have severe worldwide repercussions. Thus, hitting China’s exports also means hitting its domestic economy—a risk no country can afford to take.

In U.S.-China trade, China runs a surplus while the U.S. runs a deficit. Trump’s first presidency began in 2017. In 2016, the U.S. trade deficit with China was $346.8 billion. By 2023, it had fallen to $279.1 billion, and as of November 2024, it was $270.4 billion.

China buys far fewer goods and services from the U.S. than it sells, leaving it with fewer items to target with retaliatory tariffs. Thus, when China responded to the tariffs imposed by Trump during his first presidency, it also lowered the prices of its export products.

Due to its weakness in the tariff war, China adopted a different response strategy by announcing that it would file a case against the U.S. at the World Trade Organization (WTO). However, it also faces disadvantages on this front.

The WTO’s appellate body, which resolves trade disputes, has been non-functional since 2019, as Trump blocked the appointment of new judges. As a result, the processes for resolving international trade disputes are paralyzed.

The following graph shows how WTO dispute settlement requests have dropped since 2019:

WTO Dispute Settlement Requests

Graph 1 – (Source: WTO - https://www.wto.org/english/tratop_e/dispu_e/dispustats_e.htm)

I particularly want to emphasize the term "globalized world economy" that I used above. Supply chains built on a "rules-based trade" system over decades cannot be reshaped quickly. Based on my personal experiences from the 1990s, I know how difficult it is to build supply chains. The new U.S. tariffs signal economic problems that will spread worldwide.

Trump is accelerating the process of undermining and dismantling global institutions that he started during his first term.

New debates are emerging regarding the legal basis behind the justification for Trump’s tariffs. Legal processes seem possible, similar to his attempt to end birthright citizenship in the U.S.

In the U.S., the president must seek Congressional approval before or after decisions related to international trade. Trump justified his recent tariff decisions under the "International Emergency Economic Powers Act (IEEPA)" of 1977. He cited two emergencies: immigration and fentanyl. Some believe Trump could have used other laws or regulations for these tariffs, while others argue that IEEPA is appropriate.

No previous president had ever used IEEPA to impose import taxes. Its predecessor was invoked in 1971 by Nixon, who declared a potential balance of payments crisis as an emergency, imposing a 10% tariff on all U.S. imports without country discrimination, marking the beginning of the end of the post-WWII Bretton Woods system.

Trade rule changes and applications in international trade have never been followed in real-time before. For the first time in history, trade wars are being watched like a sporting event.

We are witnessing the erosion of law and institutions on a global scale. Some commentators question why the protests are louder today, despite similar strategies during Trump’s first term. Developments have left many surprised. Trump’s second term is far more intense and rapid than his first.

Globalization had already ended, but until recently, there was no statistical proof of "deglobalization." Now we are beginning to see these statistics emerge. Instead of negotiation, tension has been chosen. Anti-Americanism and its political repercussions will also surface.

We will follow developments with Canada and Mexico for 30 days. Even if tariffs are not implemented next month, the uncertainty and doubt will have a cost. There is even talk of Canada being proposed as the 51st state.

Where does Trump stand in U.S. international trade policies after the industrial revolutions? We are going through a historical transformation. I explored this question in February’s Economy and Society magazine. That article will be published soon.