When US President Donald Trump announced an unprecedented increase in tariffs against foes and allies on April 2nd, the so-called ‘Liberation Day,’ Goodfellow, a UK advanced materials and metals supplier, suffered a setback overnight. An initial review estimated that the cost base for its American sales rose by approximately 10 percent, a blow for a firm that derives 35 percent of its business from the US. “From prior experience of the Trump administration, we always knew there would be some significant measures introduced and the President didn’t disappoint,” says Andrew Watson, Goodfellow’s chief finance officer. Although Goodfellow sources a small amount of its purchases from China, 150 percent cost hikes can cause major disruption. “While we can try to re-source this, it is not always possible, particularly with some materials that can only reliably be sourced from China,” says Watson, adding: “We also have incidents of US origin products – bound for China – that cannot now be sold economically.” The company exports to over 60 countries and potential EU retaliatory tariffs would raise costs for its Baltimore-based subsidiary. “We can deal with the consequences of the ‘new normal,’ but we cannot plan for constant changes,” Watson warns. “There is no way of getting around the simple fact that even the best scenario results in higher prices for customers and changes to supply chains.”
Free but alone
Few people were surprised by the Trump administration’s embrace of tariffs as a means of reshoring manufacturing jobs. During his campaign, Trump expressed his support for an aggressive trade policy. Yet, such a massive spike in tariffs, pushing average rates back to mid-20th-century levels, surprised even the staunchest protectionists, as even traditional US allies such as Australia and Japan were affected. The method used to calculate new rates also raised questions. When Trump presented a cardboard chart with the new rates, it was assumed that they incorporated a combination of existing tariffs and other trade barriers. It later emerged that for each country the US administration had divided the trade deficit in goods by total imports and then halved the result. Even net importers like the UK were hit with minimum tariffs of 10 percent. Less surprisingly, services, an area where the US excels, were excluded.
Even the best scenario results in higher prices for customers and changes to supply chains
The US has run a trade deficit for several decades. American consumers and businesses spend and invest more than they earn, meaning that it may persist despite increasing tariffs. With many trade partners, the deficit stems from geography, for example fruit being easier to grow in warmer climates. These practicalities seem of little interest to an administration determined to overturn the status quo. “Trump wants to end up with low and balanced tariffs,” says George Calhoun, who teaches quantitative finance at the Stevens Institute of Technology, pointing to a 2018 G7 summit where Trump called for the elimination of all tariffs. “He wants to equalise or ‘reciprocalise’ the trade landscape among major trading partners. The era where the US ran a parallel Marshall plan for trade by allowing highly asymmetric trade arrangements to continue is coming to an end.”
Supporters of the US President argue that the tariffs are merely the first step in a longer-term strategy. If true, a 90-day pause on tariffs higher than 10 percent announced in late April was a strategic move to provide time for concessions from trading partners. For opponents, the climb-down signalled a major policy failure, partly imposed by turmoil in financial markets, with a recession looming as an unintended consequence. According to the survey firm Consensus Economics, economists expect the US economy to grow nearly a percentage point less than previously projected in 2025. JPMorgan Chase CEO Jamie Dimon expressed concerns that a recession was imminent, which reportedly pushed Trump to scale back the tariffs. Undoing the damage that tariffs have done to business confidence will be difficult, says Nick Rakovsky, CEO of DataDocks, a logistics software company processing US warehouse appointments. “The pause removed an immediate cost spike and helped with cash‑flow forecasts, but it hasn’t repaired confidence. Without a clear timeline, scope and escalation path, companies prefer the flexibility of short bookings and higher safety stock to committing long term.” However, revenue from tariffs could help fill government coffers ahead of any stimulus required to prevent a recession, and could also be used to pay down government debt, says Nick Baker, an expert on trade at FTI Consulting.
Political considerations also come into play. A recession could lead to a Republican loss in the mid-term elections in November 2026. Trump’s own electorate will feel the pinch, with inflation expected to rise up to four percent if the initial tariff rates are maintained. A survey by the Cato Institute and YouGov found that 40 percent of Americans were concerned about inflation and just one percent about trade. Unravelling long-established supply chains will be difficult, given that producers will take time to switch to domestic suppliers and imports won’t drop immediately. “Many sectors rely on complex supply chains that have been forged over many years. You can’t simply rip this up, wave a magic wand and have a US supply chain that does everything,” says Goodfellow’s Watson, adding: “Rare materials often come from a limited number of global sources and any disruption caused by tariffs or trade restrictions could create bottlenecks for research and industry.” Most trade between developed economies is intra-industry, notably trade in machinery used in manufacturing, meaning that the tariffs would indirectly hit US producers too, notes Stephen Buzdugan, who teaches international business at Manchester Metropolitan University: “Tariffs of 20 percent or higher on imports from Japan, Korea, China and the EU will have knock-on effects on production costs across the US and other industrialised countries.”
Europe’s dilemma
For the EU, a key US trade partner, ‘Liberation Day’ wasn’t a surprise, given Trump’s aggressive trade policy during his first term and his accusations that the EU is “ripping off” the US. The Trump administration has claimed that the EU imposes a 39 percent tariff on US products, despite a World Trade Organisation (WTO) estimate of just five percent. For their part, European policymakers perceive the tariffs as an existential threat, given the EU’s role as a defender of a rules-based trade order. The US has imposed a 25 percent tariff on European steel, aluminium and cars, as well as a blanket 10 percent tariff on all EU imports. A doubling of the latter has been paused until July, as the two sides have exchanged negotiating documents. Although the EU suspended its initial retaliatory tariffs to leave room for negotiation, if this fails it plans to respond with a €100bn tariff package targeting imports that include Boeing aircraft, medical devices, cars and bourbon whiskey.
You can’t simply rip this up, wave a magic wand and have a US supply chain that does everything
The bloc’s response will be shaped by political calculations regarding its relationship with the US and internal divisions. Member states with strong US exports, such as Ireland and Italy, have called for a more conciliatory approach, while others are urging the bloc to stand firm against Trump’s bullying tactics. A decision will be reached through qualified majority voting, but the US has little chance of dividing its European trade partners, says Niclas Poitiers, a research fellow at the Brussels-based think tank Bruegel, pointing to Brexit and recent EU levies on Chinese electric vehicles as examples of member state alignment despite disagreements: “You want to have a broad support for your measures, otherwise they might not be credible as a threat towards the US, but there is no need for unanimity.” Some member states are cautious about antagonising the US due to security concerns, with a recent Nato summit set to discuss European defence spending amid the Ukraine war. Trump has demanded that European allies increase their defence spending to five percent of GDP and assume more responsibility for the continent’s defence.
Some observers think a scenario similar to last May’s UK-US trade deal is the most likely outcome. The UK managed to secure cuts to the 25 percent tariffs on car and steel exports but failed to reverse the flat 10 percent levy, which has left Britain facing a tougher trading relationship with the US. One ace up the EU’s sleeve is targeting digital services, an area where the US maintains a net surplus. “If you want to include services, you have to think outside of the box,” says Poitiers, adding that the EU has a new tool, the Anti-Coercion Instrument, that allows it to employ the entire toolbox of regulation available to hit US tech giants. Ireland, which hosts many of them, may face pressure to revise its favourable tax regime. “That is member competence and Ireland does not want to kill the golden goose. They will probably be opposed to any measures that will undermine their business model,” Poitiers notes, adding that the Commission could still take a creative approach. “There is a lot of retaliation potential that could escalate this beyond a traditional trade conflict.”
A side effect of strained EU-US relations might be closer ties with other major trade partners. Brussels is reviving a plan to form a strategic partnership with a 12-country Indo-Pacific trade bloc that includes Canada, Japan, Mexico and the UK. Trade relations with China may also improve, despite tariff tensions over electric vehicles. However, the trade imbalance between the two has only grown worse, despite the EU’s efforts to curb it. “The European and Chinese economic models are not compatible, and the spillover effect of China’s economic model exporting into Europe has a level of a deindustrialisation risk,” says Jacob Gunter, lead economist at the Berlin-based think tank Mercator Institute for China Studies (MERICS), adding: “There is no agreement that the EU and China could come up with that would prevent that from happening.”
China on a path to war
If the European Union hopes to meet Trump halfway, China finds itself in a different position. As the country with the world’s largest trade surplus, the Asian country is the primary target of US protectionism, which threatens to undermine its export-driven economic model. For now, the two countries have agreed to a temporary pause, reducing US tariffs from 145 to 30 percent, while China slashed its retaliatory tariffs from 125 to 10 percent. “This ceasefire is functionally a recognition that the escalation ladder was scaled too high and too quickly, and that the pace of US-China decoupling needs to be adjusted to avoid a crisis undesired by both sides – like a complete breakdown in global value chains or a recession,” says Gunter from MERICS, adding: “The fundamentals in the economic and technological relationship, to say nothing of the security and geopolitical situation, remain deeply imbalanced and increasingly irreconcilable.”
China has signalled its intention to resist unilateralism by restricting rare earth exports and agricultural and energy imports, while also issuing travel advisories discouraging Chinese tourists from visiting the US. Its strongest weapon remains its dominance of rare earths, with further export restrictions to rare earth elements and magnets potentially threatening US production of robots, fighter jets, wind turbines and cars. “China has done a lot more to prepare for a shootout like this with the US. That has been the central pillar of their economic policymaking for the last 10–15 years, especially since the first Trump administration,” says Gunter. Trump has imposed port fees of $1.5m on China-built vessels, a measure the World Shipping Council estimates could double the cost of shipping US exports. If the US wanted to escalate, it could further restrict China’s access to critical technologies. “What keeps Xi Jinping up at night is getting technologically cut off. The US could simply ban the sale of chips and specific equipment to China,” Gunter says. “That choking-off has happened in semiconductors, semiconductor manufacturing equipment and lithography machines. But it has been relatively limited and less effective than hawks in Washington would prefer.”
China has done a lot more to prepare for a shootout like this with the US
The domestic front is equally important. US tariffs will hit Chinese exports, depreciating the yuan and indirectly leading to capital flight, a serious risk to the Chinese regime, Calhoun estimates. China has more to lose since it is more committed to a global economy, says Shameen Prashantham, who teaches at the China Europe International Business School, given that its “export-oriented companies will face strong headwinds and some of them will fail to survive, leading to job losses and a drag on growth.” On the other side of the Pacific, if enough Republicans side with Democrats in Congress, they could strip the president of his unilateral tariff powers. “China might wait to see how their negotiating position improves as small companies have to fire workers and truckers and port workers have less demand because of fewer goods coming into the US,” Gunter says. “These are important constituencies that will be extremely angry the longer this goes on.”
One way for China to resist pressure is by forging ties with other trade partners, defying the Trump administration’s plan to disrupt its supply chains. The Chinese government has called for a joint response to tariffs with traditional US allies such as Japan, South Korea and India. President Xi Jinping has launched a charm offensive targeting Vietnam, Malaysia and Cambodia – countries through which China diverted exports to the US during Trump’s first term – but has also warned them against striking bilateral deals with the US.
Many experts have pointed as a desired endgame for the Trump administration a China-US agreement similar to the Plaza Accord in 1985, when the Reagan administration effectively forced its trade partners, notably a surging Japan, to appreciate their currencies against the dollar to reduce the US trade deficit. Economists believe this marked the beginning of Japan’s economic stagnation. “Chinese leadership is afraid of the Plaza Accord and will absolutely resist anything like that,” Gunter says. Another scenario is a temporary truce with a deal that makes Trump believe he won by committing China to purchases of LNG, soybeans and Boeing jets. “That would be a victory for China, because what Xi wants to do is to buy time for his agenda, which is achieving technological self-reliance from the US and becoming less dependent on exports to the US and its allies,” Gunter says.
The end of an era
The trade war rekindles a debate that started during Trump’s first term: is this the end of globalisation? Optimists argue that such forecasts are premature, given that global trade growth is expected to be driven by emerging economies. Recent trade deals, such as the EU-Mercosur agreement, demonstrate continued appetite for market liberalisation. Even if the US chooses isolation, it accounts for just 13 percent of goods imports. Booming trade in services is expected to offset a decline in goods exchanges. International supply chains remain robust, argues Poitiers from Bruegel, pointing to the pandemic as proof of their resilience: “This was an incredible shock, much larger than the trade shock we experience now. Despite all the talk about the end of global value chains, it didn’t happen.”
At the centre of the global trade war lies a surprising US grievance: the dollar’s position as the global reserve currency. In a controversial paper published last November, Stephen Miran, chief economic adviser to President Trump, claimed that the dollar’s status as the reserve currency is a ‘burden’ contributing to chronic trade deficits.
Dollar and treasuries: Still safe havens?
The paper, which is believed to have influenced US policy, concluded that the US should deliberately weaken the dollar and compel holders of US sovereign bonds (known as treasuries) to fund its defence spending. Financial market turbulence since ‘Liberation Day’ suggests that foreign investors are not convinced, effectively questioning the role of treasuries as the global reserve asset and driving up US debt refinancing costs.
The head of Congress’ fiscal watchdog has warned that this crisis could mark a tipping point in investor willingness to hold US assets, potentially sparking a capital flight crisis. China’s recorded treasury holdings have dropped below those of the UK for the first time since 2000, a sign the country is diversifying away from US assets.
Last May, Moody’s stripped the US of its final triple-A credit rating, citing rising government debt and a growing budget deficit. For the first time in history, the US no longer holds a top rating from any of the three major credit rating agencies. “Rising protectionism and economic nationalism may lead to a gradual fragmentation of financial markets, where capital becomes more regionally concentrated rather than flowing freely across borders,” says Supriya Kapoor, who teaches finance at Trinity Business School.
“Financial institutions may face increased regulatory divergence, higher compliance costs, and restrictions on cross-border mergers, acquisitions and operations, all of which could dampen the efficiency and profitability of global financial services.
It is no surprise that in such a precarious geopolitical landscape, international organisations like the WTO have come under fire as outdated pillars of multilateralism and a rules-based trading regime in an increasingly unilateral world. Pessimists warn that the trade war could be the final nail in its coffin. “It may well be the end of the WTO as we know it. The WTO has failed to manage a fair trade regime, despite its high aspirations,” says Calhoun, adding: “The proliferation of non-tariff trade barriers has raged on, with the level of complaints surging from many countries, and mostly aimed at China.” The Trump administration has hinted at a possible withdrawal from the organisation, a radical shift from traditional policy, given that the US has historically been the main promoter of open markets. Such a move would be far from shocking though, since unilateral US tariffs violated the WTO’s core principle of the most-favoured nation (MFN) treatment, which some experts interpret as de facto US withdrawal.
“Their idea of a trade deal is not to create opportunities, but to dictate outcomes,” says Craig VanGrasstek, a trade policy expert who has written a history of the organisation, adding that current US policy undermines the MFN rule. “The US leaving would be bad for the organisation, but the US staying as a spoiler would be worse,” VanGrasstek argues, adding that there is a possibility that other members may try to expel the US. Optimists, however, believe that the tumult caused by the trade war could reinvigorate the WTO by accelerating long-awaited reforms, notably of its dispute settlement mechanism. A US withdrawal would also push other countries to work together, with BRICS members and the EU taking the lead. “China sees a lot of value in the WTO. It’s the framework through which it trades with the world,” Poitiers says. “If countries representing 85 percent of global GDP still want to use the system in its current form, it can chug along for quite a while.”
The WTO has failed to manage a fair trade regime, despite its high aspirations
The role of trade has fluctuated over time, with protectionism making an ugly comeback every few decades. Many historians draw parallels to the 1930s, when the infamous Smoot-Hawley Tariff Act raised US tariffs, prolonging the Great Depression and fuelling populist forces that led to the Second World War. However, unravelling decades of global economic integration would be much more difficult today. A decoupling of the Chinese and US economies in particular would have major consequences for the global economy, from higher inflation rates to lower growth. “Smoot-Hawley was very destructive, but didn’t increase tariffs to unprecedented heights because average tariff rates were very high back then. Current US tariffs are enacted in a period of unprecedented economic interdependence. The effects are in a league of their own,” Poitiers says, adding: “The US is withdrawing as a leading force of globalisation, but it will likely pay a high price for that.”
The real threat is not the end of globalisation, but a fragmentation of the current system into competing trading blocs, warns VanGrasstek. What is worse, we might be at an unprecedented junction of history where no superpower has an incentive to maintain an open trading system, VanGrasstek argues, given that even China’s economy is becoming less exports-driven. “Both the US and China have very strong incentives to move towards bloc formation, and that is where we may be headed. That means that we are moving into a 1930s style system, and that is very dangerous.”