The ongoing trade war initiated by Trump has prompted countries to seek new trade relationships. Efforts to rebuild open trade are likely futile as nations focus on countering China's dominance in key industries.
Key points
Trump's tariffs initiated a long trade war.
Countries are forming new trade relationships.
Efforts to rebuild open trade are likely futile.
Global trade is focusing on countering China's dominance.
The US remains China's main opponent in trade.
Mentioned in this story
European UnionMercosurMark CarneyChina
We are in for a long trade war.
In the months since “Liberation Day” last year, when Donald Trump let loose a volley of tariffs against imports from everywhere, countries have rushed to build new relationships in the hope of maybe circumventing the US to protect the global trading system.
The European Union hurried to sign a trade agreement with South America’s Mercosur bloc that had been sitting on ice for years. China and south-east Asian nations deepened their trade agreement. The Canadian prime minister, Mark Carney, travelled to Beijing hoping to build closer ties.
Hopes of rebuilding the open trade architecture are probably futile. Global trade will be shaped by an emerging new imperative, to stop China’s export juggernaut and end its lock on the supply of strategic inputs – from pharmaceutical components to critical minerals to essential chips that are vital for industries around the world.
The United States will remain China’s main opponent. But other countries, in Europe and elsewhere, are also rummaging through their policy kits to evaluate their options, from tariffs and domestic subsidies to export controls.
The war will come at a cost to economic wellbeing. Prices of consumer goods will rise as countries block imports from China. Manufacturers will have to cope with pricier Chinese inputs. Chinese exporters will have a harder time finding markets to place their stuff. And exporters in the US and elsewhere may be locked out of China’s market.
The risk that looms high over all others is that China will, as it has done before, leverage its dominance in the critical commodities and products over which it has a near monopoly, cutting off supplies to retaliate against countries that block its products or seek to shake its dominance.
Trump, of course, will not manage this well. His scattershot protectionism, raising tariffs across the board with no discernible strategy, and his belligerence against countries that would be natural allies in the brewing conflict, guarantee that American trade policy will remain a hot mess until the end of his term. Hopefully, the next administration will bring strategic thinking to the fight.
It is perplexing how the global economy arrived at this spot. China accounts for about a third of the world’s manufacturing output, from only about 5% in 1995. Its share of global manufacturing exports rose from 3% to 20% over the period. It accounts for over 50% of the global exports of hundreds of manufacturing products. Even Germany, with its robust industrial pedigree, is worried that its industry . China’s swelling current account surplus – officially 3.8% of its gross domestic product according to some analysts – has become a global threat.
Q&A
What triggered the current trade war involving China?
The trade war was triggered by Donald Trump's implementation of tariffs against imports from various countries.
How are countries responding to the trade war with China?
Countries are forming new trade agreements and evaluating options like tariffs and subsidies to mitigate the impact of the trade war.
What are the implications of the trade war for global trade?
The trade war is reshaping global trade dynamics, as nations prioritize strategies to counter China's export dominance and secure essential supply chains.
Which countries are seeking closer ties amid the trade war?
Countries like the European Union and Canada are seeking closer ties with regions such as South America and Asia to navigate the trade war.
Economists observe there is a peaceful path out of this conundrum. Jason Furman, who chaired the US Council of Economic Advisers under president Obama, points out that as a means to improve the welfare of the Chinese, Beijing’s approach looks like a mistake. Getting the Chinese to save less and consume more – say, by building a more generous social safety net – would improve their wellbeing and bolster China’s sluggish economy without flooding the rest of the world with stuff.
And yet, Furman also observes that Beijing may be aiming for a different objective: “maximizing your geopolitical dominance; not the economic welfare of your citizens”.
Governments well beyond Washington believe this to be the case: China, the story goes, is not merely turbocharging exports to prop up growth. It is building an arsenal for a trade war. Beijing is doing nothing to dispel this fear. In a 2020 speech, President Xi Jinping argued that “we must tighten international production chains’ dependence on China, forming a powerful countermeasure and deterrent capability against foreigners who would artificially cut off supply.”
China offered an early taste of its capabilities in 2010, when it cut exports of rare earths to Japan after the Japanese captured the captain of a Chinese trawler near disputed islands. Earlier this year, it again punished Tokyo for statements on Taiwan by curtailing supply of magnets and minerals.
It has aimed far and wide. Last year, Beijing forced the Dutch government to walk back its takeover of Netherlands-based chip maker Nexperia by blocking chip exports from Nexperia’s plant in Dongguan. And it tightened restrictions on exports of rare earths and magnets – critical components in fighter jets and submarines, mobile phones and EVs – to force the Trump administration to dial back its trade war.
China benefited enormously from the globalization of the last 50 years. Yet it seems Beijing didn’t buy the argument that economic integration is meant to build interdependence and shared prosperity. “They don’t want interdependence, they want everybody to depend on them,” said the trade economist Chad Bown, co-author of the newly published book, How to Win a Trade War. “Their goal was to acquire market power.”
The notion that an open, rules-based trading system can be rebuilt, perhaps around China in the absence of the United States, cannot survive this strategy.
Cecilia Malmström from the Peterson Institute for International Economics counts 50 ongoing antidumping cases by the European Commission against Chinese imports, up from seven in 2024. Europe has imposed duties or tariffs on Chinese EVs, solar supply chains, glass fibers, steel cylinders and more.
Partly at the behest of the US, Mexico last year imposed a tariff of up to 25% on imports from countries with which it does not have a trade agreement, a move aimed directly at China. The World Trade Organization reports more than 300 antidumping investigations since 2020 by low- and middle-income countries against Chinese exports.
The hostilities will get messier. The first order of business for the US, Europe and other major economies is to build alternative sources of critical commodities and other inputs, a process the US started upon during the Biden administration, which provided subsidies to develop chip-making capacity and sought new sources for some minerals.
It will be a slow, tortuous and dangerous process, though. Developing alternative sources for things like rare earth magnets will take time. And China could well retaliate by cutting supplies to any country that tries. Moreover, many potentially valuable allies – think Indonesia and its vast supply of nickel – have close economic ties to China that they are unlikely to willingly challenge.
There are better and worse ways to do it. Trump’s hitting out at potential allies, protecting industries willy-nilly, with no regard to their strategic importance is obviously the wrong one. His goal, to cut the current account deficit, makes no sense. (Growing imports from other markets have more than compensated for falling imports from China.)
But even a better, post-Trump strategy, one in which the US coordinates with allies to rebuild critical supply chains and carefully targets tariffs and subsidies to encourage truly strategic industries, will not avoid economic pain. Let’s be ready.
