In the past five months Donald Trump has delivered the largest shock to the rules-based international trading system since its emergence in the aftermath of the Second World War. This disruption stems from the sheer size of the tariff increases the president has imposed. The average tariff rate for the world’s largest importer rose from 2.5 per cent in 2024 to 28 per cent in early May and was still at 17.8 per cent after bilateral deals with Britain and China reduced or temporarily paused some increases.
It also reflects the high degree of uncertainty created by the president’s decision to ignore relevant multilateral World Trade Organization (WTO) rules, as well as the United States’ 20 existing bilateral free trade agreements, and to treat allies as harshly as strategic competitors.
Some of the consequences of this shock cannot be reversed. Yet, it is likely that a reshaped rules-based international trading system will eventually emerge with or without the US. Global economic growth and prosperity are dependent on a stable cross-border business environment underpinned by legally constituted rules for setting tariffs and changing them, as well as for managing non-tariff barriers. Although the US seems to have largely abandoned this approach under President Trump, other countries have not. Moreover, they are likely to retain this approach, even if Trump continues to use tariffs as an all-purpose tool in American international economic policy.
Two questions will be critical in determining the international trading system’s future. First, how Trump resolves the tariff disputes he initiated with America’s major trading partners, taking account of possible domestic US legal and political constraints, and how they respond. Second, how committed other countries remain to upholding a rules-based approach to trade and investment order ‘around’ the US, and whether the US disrupts or eventually rejoins the system that is ultimately formed.
Outlook for US trade policies
Despite the chaotic nature of Trump’s tariff campaign, it is possible to identify three distinct components. First, a wave of tariff increases began on February 4 targeting the US’s three largest trading partners which together account for more than 40 per cent of US trade in goods (25 per cent on Mexico and Canada, and an additional 10 per cent on China). Substantial sectoral tariffs have followed on US imports of steel, aluminium and cars from around the world (some of which have been further increased); then, on April 2, ‘reciprocal tariffs’ ranging from 10 to 50 per cent were imposed on all countries – except Canada and Mexico –based on a simple formula tied to bilateral trade deficits.
Second, Trump interspersed these increases with temporary pauses and rollbacks for particular countries or products. Thus, on March 6, he paused tariffs for one month on imports from Canada and Mexico covered by the USMCA free trade treaty. On April 9 he ordered a 90-day pause in reciprocal tariffs above the basic 10 per cent for all countries except China. And on May 25, he delayed a proposed 50 per cent tariff on all goods from the European Union, having announced it only a couple of days before. In some instances a tariff pause appears to have been linked to progress being made in negotiations or a fear of retaliation –as with the EU and Canada. In others it has been linked to negative bond and equity market reactions. In certain sectors – for example the tech sector – rollbacks were a direct result of US industry lobbying.
US President Donald Trump delivers remarks on reciprocal tariffs during an event at the White House in Washington, DC, on 2 April 2025. Photo: Brendan Smialowski /AFP via Getty Images.
Third, Trump initiated a series of bilateral trade deals aimed at reducing or eliminating recent tariff increases and retaliatory measures. The first of these was signed with the UK on May 8 and a second was reached with China on May 12. And more may follow in the next few weeks. However, these are not legally binding trade agreements, which would take a year to 18 months to reach. They are fragile, provide only temporary or partial relief and often state a commitment to agree something in future.
The two deals agreed so far leave the US with a historically high level of tariff protection on most goods – at the time, 40 per cent on Chinese goods imports, for example – and considerable uncertainty over the precise nature of Britain’s commitment to secure US supply chains against Chinese influence. Financial markets have taken comfort from the two agreements reached so far, but it is doubtful that this is justified.
Trump is using a single instrument – tariffs – to try to achieve a number of goals, namely, to reduce perceived trade barriers, to raise government revenue, to encourage reshoring of investment to the US and to deliver a range of non-economic foreign policy objectives – from restricting migration to controlling the inflow of fentanyl precursors. So far, he has not prioritized one goal and seems unlikely to do so.
Trump has already said he plans further sectoral tariffs, for instance on medicines, and may well respond aggressively – by re-imposing tariffs – to actions other nations take, such as the EU’s measures to counter the monopoly power of US big tech and implement a carbon border adjustment mechanism from the start of 2026.
It is also unclear how far he will be constrained by market reactions, judicial review or political unpopularity at home. The administration is appealing the May 28 decision of the US Court of International Trade that Trump does not have the authority under the International Emergency Economic Powers Act to impose the broad-based reciprocal tariffs (and in any case appears to have a number of alternative legal bases for them). Trump retains a strong grip on his Republican base, notwithstanding weak poll ratings, and seems, at least in the near term, to have conditioned financial markets to accept policy measures which in the past would have triggered highly negative reactions.
Meanwhile, other major economies – particularly the EU and China – may refuse to accept a permanent asymmetric relationship with the US, leading to continuing trade tensions and the possibility of retaliation by the EU in the services sector. They will be more reluctant to make fundamental concessions in trade negotiations with the US given Trump’s disregard of previous bilateral agreements. The EU is likely to respond to Trump’s weakening of transatlantic security guarantees and threats against Greenland by trying to ensure that its economy is sufficiently de-coupled from the US to underpin an independent defence capability. China, for its part, is continuing to diversify its external markets as fast as it can to reduce reliance on US demand.
Given the above, US trade policy is likely to remain a disruptive feature of the global economy, even beyond Trump’s presidency. International companies will still seek to serve the US market, including through re-shoring, but will be cautious about including it in globally integrated supply chains. The extent to which ‘working around the US’ becomes a distinctive feature will depend crucially on how far the rest of the world is able to preserve an ordered global trade and investment system in the face of US disruption.
The global response
Though the US remains the world’s largest economy, accounting for 26 per cent of global GDP by market value, it has become less dominant in global trade and investment. Approximately 80 per cent of world trade does not directly touch the US and most of it continues to be conducted under WTO rules. This raises the possibility that the rest of the world could maintain a stable and predictable world trade and investment system around a disruptive US.
Initially, other countries responded to Trump’s tariff campaign bilaterally, but there is now an increasing focus on a wider policy response. Policymakers in Canada, the EU and India have emphasized the need to address internal barriers to trade and investment in response to the US raising external barriers. Completion of long-standing free-trade agreements has also accelerated since Trump was elected.
Political agreement was reached on the EU–Mercosur agreement in December 2024 and on the UK–India free-trade agreement in May 2025, while members of the EU and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) free trade area are seeking to deepen cooperation, as are the Gulf Cooperation Council and ASEAN. China has also reduced trade barriers to the least developed countries.
However, a coordinated response to US policies is also needed. Chief among the concerns is that retaliatory responses to Trump’s policies could force countries to diverge from two key principles of the WTO. First is the ‘most favoured nation’ principle under which a member of the WTO is obliged to offer all its trading partners the same concessions. Second is the national treatment principle, under which WTO members commit to treat all domestic and imported goods equally once they enter a country’s market. The types of concession the US is seeking in tariff negotiations may make it hard for countries to maintain these WTO obligations.
America aside, WTO members need to develop a vision of a reshaped international trading system. This requires leadership which so far has not been evident. The EU is arguably the natural candidate but has so far held back – possibly reflecting internal divisions and the desire not to aggravate Trump. Some kind of collective leadership spanning at least the EU and CPTPP and possibly China will need to be developed with countries working behind the scenes.