Global trade wars warning if Trump embraces US protectionism

The detail of the incoming Trump administration’s trade policy has still to be set, but during his election campaign, Trump indicated that a blanket increase in tariffs on imports to the US will be applied, possibly up to 20%. Higher tariff increases – potentially 100% or more – have also been mooted in relation to certain imports from specific countries.

Materials like aluminium and steel, as well as whole vehicles or their components, are among the products likely to be hardest hit by US measures, given the importance of related US industries and the jobs they support, said Dr. Totis Kotsonis of Pinsent Masons, who warned the effects would be felt not only by the US’ trade rivals like China, but also traditional trading partners like Canada, Mexico, South Korea, the EU and UK – and by the global economy as a whole.

“Trump has already made it clear that he intends to protect US industry,” Kotsonis said. “He will do that primarily by raising tariffs. The question then is what does that do to the world economy? Well, there have already been economic reports showing that growth across the globe will suffer and that GDP would be reduced. In fact, the same reports indicate that the US GDP would also suffer as a result of the imposition of higher tariffs.”

“It seems that the Trump administration is focusing on the protection of domestic industry and growing domestic industry irrespective of the effects that trade protective measures might have on traditional allies. For example, a threat to impose tariffs higher than 100% on automotive vehicle imports will hit Mexico quite hard as well as allied countries such as Germany.”

“There are also concerns that with US domestic productivity rising this would lead to greater inflation meaning that US interest rates would need to stay high for longer. Ultimately, a more protectionist US trade policy could lead to a number of countries retaliating by imposing their own counter-punitive measures against the US, and there is likely to be an increase in trade disputes as a result of the policies that we expect Trump would introduce once he becomes president in January of next year,” Kotsonis said.

For example, the basis on which the new US administration may impose punitive tariffs against specific imports from certain countries is likely to give rise to disputes as to whether this would be permissible under the World Trade Organization (WTO) rules, which are broadly designed to protect against protectionism and discriminatory treatment.

During the first Trump administration, the US relied on a number of occasions on the so-called national security exception in the General Agreement on Tariffs and Trade (GATT) in raising tariffs so as to protect US domestic industries. This exception allows WTO countries to take any action they consider necessary for the protection of their ‘essential security interests’.  However, its use by the US has proved controversial, with a number of trading partners, including the EU, taking a narrow view as to the circumstances in which reliance on this exception can be justified, arguing that a more flexible interpretation undermines the rule-based trading system which the WTO is meant to embody.  

Kotsonis said the previous Trump administration invoked this exception to justify tariffs it imposed on steel and aluminium imports, leading to retaliatory action by a number of major trading partners including the EU and China.

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The trading relationship with China, in particular, is likely to continue to preoccupy the new US administration. Already, under the current Biden administration, prominent semiconductor equipment manufacturers have come in for scrutiny in the US over their shipments to China amidst concern that they are being put to military use. 

Ultimately, a more aggressive approach to the interpretation of WTO rules by the US, including as regards the application of the national security exception, could lead to further disputes and trade wars. These would be more difficult to resolve, given that the WTO dispute resolution mechanisms have not been fully operational since December 2019 when the then Trump administration refused to give consent to the appointment of replacement judges to the WTO’s appellate body.  That means that the losing party to a WTO dispute can appeal a WTO panel’s decision to the appellate body knowing that that decision cannot be adopted given that the appellate body is currently not functioning.

At the same time, countries such as the UK, and to some extent trading partners like the EU, are likely to be minded to take a more measured approach and not adopt measures that are likely to escalade trade tensions further with the US, Kotsonis said.

“I think we would see, as we did see during Trump’s first term and indeed under the Biden administration, attempts to get the US around the table and try to resolve trade disputes at a bilateral level. In this regard, it is clear that both the UK and EU are likely to be mindful of the importance of the balancing act that they would need to perform in seeking to protect their own economic interests whilst not taking measures that are likely to escalade further disputes with their most important strategic ally.”

According to Kotsonis, however, a potential flaring of trade relations between the EU and US, and the UK and US, could arise when new carbon border adjustment mechanisms (CBAMs) become fully operational.

Kotsonis said: “The EU CBAM legislation is already in place and will come fully operational in January 2026. Its effect would be to increase the cost of importing certain products from countries that have lower environmental standards than the EU, by requiring the payment of a ‘carbon price’ at the border, to take into account the carbon emissions generated in their production. Although the US is not likely to be affected as much as some other trading partners such as China, it  would nonetheless still be affected. At the same time, the Trump administration might be less amenable to introducing the type of carbon emission reduction policies that CBAM is seeking to encourage, leading to further tensions in bilateral relations.”

“The UK is introducing its own CBAM due in January 2027, so again, there is a question of whether that would lead to retaliatory measures by the US if their products become more expensive as a result,” he said.

According to Kotsonis, for business based outside the US, the new Trump administration’s trade policy could require them to explore alternative markets for exporting goods to, as those goods could be more expensive – and therefore less attractive – to US customers than “domestic equivalents”. US-based businesses would also be impacted where they rely on suppliers based outside of the country, he said.

“Each company will have to look into its own supply chain arrangements to see whether raising tariffs would affect them and, if so, what alternatives they have,” Kotsonis said. “If based in the US, can they replace adequately those supply chains with US domestic supply chains? If outside of the US and your products become more expensive, potentially you do look to markets outside the US. Ultimately, a more protectionist US trade policy will have ripple effects and is likely to affect businesses trading globally or relying on cross-border supply chains.”