The international trading system needs urgent support to survive 

Given the threat posed by President Trump’s trade strategy, the EU, CPTPP and China must work together to preserve and revitalize the WTO and other key elements of the world trade and investment system. 

Expert comment Published 12 February 2025 4 minute READ

Creon Butler

Director, Global Economy and Finance Programme

President Donald Trump has not yet officially withdrawn the US from the World Trade Organization (WTO). However, by imposing tariffs on China and nearly doing so on Canada and Mexico, he is walking away from WTO rules and norms. 

The rest of the world has a strong interest in maintaining the international trading system, even if the US chooses effectively to opt out. But this will require countries faced with US tariffs to complement their national responses with urgent collaborative action.

Tariff shock

President Trump left no doubt during November’s US election campaign that he saw tariffs as a desirable economic and foreign policy tool. 

President Trump’s… decision on 1 February to implement 10–25 per cent tariffs against Mexico, Canada and China…was highly unlikely to comply with US obligations under the WTO.  

Even so, his decision on 1 February to implement 10–25 per cent tariffs against Mexico, Canada and China came as a shock. Those countries account for more than 40 per cent of US total trade in goods.

The move was linked to vague demands and was not preceded by any serious attempt to negotiate. Nor did it distinguish between close allies and strategic competitors, or between countries in a free trade agreement with the US and those who are not. The decision used an uncertain domestic legal justification and was highly unlikely to comply with US obligations under the WTO.  

President Trump sees tariffs as a multi-purpose tool. He has threatened to deploy them to make allies increase their defence spending, coerce countries into holding US dollars as a reserve asset, roll back foreign taxes on US big tech or even force the ceding of territory to the US – whether the Panama Canal or Greenland. He has singled out the EU for future US tariffs because of the size of the bilateral EU–US trade deficit. Most recently, he announced 25 per cent tariffs on all steel and aluminium imports to the US. 

He has further weakened the norms governing world trade and investment by announcing that the US Department of Justice would no longer enforce the Foreign Corrupt Practices Act. And this may be just the start. 

Trump’s uncertain goals

Trump’s strategy is far from clear. He appears happy to see a permanent rise in the average US tariff on goods from 2.7 per cent to 15 or 20 per cent. He argues this would benefit the US economy by raising revenue from foreigners, in turn allowing reductions in domestic taxes. He also claims it would encourage more investment (and hence jobs) in the US and reduce the US trade deficit.

The amount of additional revenue from tariffs could reach several hundred billion dollars per year. But the burden would for the most part fall on US consumers and firms – not foreigners. Tariffs are unlikely to alter significantly the US fiscal position given that the Republican Party is contemplating stimulus measures equivalent to nearly $5 trillion cumulatively. The revenue may also decline over time as US trading partners find alternative export markets.   

Tariffs may trigger some additional investments in the US. But these could be offset by growing perceptions of the country as an unreliable link in international supply chains. Investment could also be deterred by higher domestic interest rates, as the Federal Reserve tries to reduce the inflationary impact of tariffs.

The IMF’s last assessment does not see the overall level of the US deficit as problematic either for the US, or other countries. Meanwhile Trump’s focus on eliminating country by country bilateral deficits will simply increase distortions and inefficiencies in the US economy.  

It is possible that Trump’s objectives are primarily political rather than economic. But a mutual defence arrangement which is underpinned by economic coercion is unlikely to be effective or lasting. And some of the president’s non-economic demands are so extreme that no amount of economic pressure is likely to be effective. 

Retaliate and negotiate

So far countries targeted by US tariffs have quickly announced their intention to retaliate – while also indicating a willingness to negotiate. In the case of Canada and Mexico, public commitments to reinforce border security helped achieve a 30-day suspension of measures. 

The EU has similarly indicated that it would retaliate to new US tariffs, including by using its new ‘economic coercion instrument’ to target the US tech industry, while at the same time indicating a willingness to negotiate. 

Retaliation is understandable despite the threat of significant additional economic damage in the short term. This is because targeted countries recognize that failing to respond is likely to encourage President Trump to come back with further demands. 

Some policymakers may also see an opportunity to combine retaliation with the pursuit of other goals: EU tariffs on the US tech industry would align with its desire to limit US big tech’s monopoly power and encourage the growth of EU-based tech firms.  

Preserving the international trading system

There are plenty of ongoing frustrations with the WTO. Some are directly related to US actions, such as the suspension of the dispute settlement system and the ever-broadening scope of the national security exemption. 

Others are of much longer standing, including the failure to address unfair Chinese state subsidies, or find ways to update rules and norms to account for the speed of tech innovation and the energy transition. 

However, a large majority of WTO members would wish to preserve a rules-based system rather than abandon it. But that will take more than benign neglect.  

80 per cent of world trade in goods does not directly touch the US, and the US is no longer the largest trading partner for many countries. But the US role in the global economy remains pivotal. A more proactive strategy is therefore urgently needed.

That requires three initial steps. First, the three major non-US trade blocks – the EU, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and China – should make a collective statement re-iterating their support for the WTO and their commitment to its principles.  

A coordinated international strategy is needed to support and revitalize the WTO and other global trade norms threatened by US actions.

Second, the same group needs to work through the implications of the emerging US tariff strategy for the stability of the WTO. If there is a risk that US action could trigger a wave of tariff increases among other WTO members, this needs to be addressed. 

Third, a coordinated international strategy is needed to support and revitalize the WTO and other global trade norms threatened by US actions. President Trump may hold off leaving the WTO in part to block such collaboration.  

But other countries still need to act. Reform may therefore require the development of increasingly comprehensive parallel structures and voluntary agreements to augment the WTO’s formal arrangements. That is already being explored in the case of dispute settlement.  

The EU is best placed to lead this effort given its track record in support of world trade, its size, and status as the world’s second largest exporter after China. Also unlike China, it has not resorted (to date) to economic coercion, giving it more authority to defend the system that President Trump’s tariffs now threaten to undo.