Navigating the New Era of Trade: Tariffs and Global Uncertainty

Apr 2, 2025 | 8 min read

The Top Line Summary

• Global trade is shifting from decades of openness towards rising tariffs, protectionism, and uncertainty, echoing past trade conflicts.

• Key drivers for this shift include trade deficits, domestic industry/job concerns, national security issues, perceived unfairness, and US energy independence.

• Escalating tariff conflicts pose major economic risks like reduced trade, higher inflation, slower growth, disrupted supply chains, and increased market volatility.

Navigating the New Era of Trade: Tariffs and Global Uncertainty

There is a major shift happening in global trade. The relatively stable system that’s been the backdrop for decades seems to be hitting an inflection point. After years of steady growth following World War II, global trade volume (as a percentage of the world's economy) has essentially flatlined since the 2008 financial crisis. Now, talk of tariffs – taxes on imported goods – and protecting domestic industries is getting louder, drawing uneasy comparisons to the 1930s trade conflicts that worsened the Great Depression. This creates uncertainty, impacts complex global supply chains, and suggests the rules of international commerce might be fundamentally changing.

So, what's driving this, and what could it mean? This post breaks down the situation using insights from recent economic analysis, covering the background, the reasons for the shift, the potential economic impacts, and what might lie ahead.

A Quick History: From Free Trade Focus to Tariff Tensions

For much of the past 70+ years, the trend, largely led by the U.S., was towards freer trade. International agreements and organizations like GATT and the WTO aimed to lower tariffs and make it easier for countries to trade goods, promoting global economic integration. This era saw a significant expansion of global commerce.

Exhibit 1: Historical evolution of trade as a share of global economy

Source: World Trade Historical Database, BEA, Haver Analytics, Deutsche Bank

However, history also offers cautionary tales. The US Smoot-Hawley tariffs in 1930 are widely seen as triggering retaliatory tariffs worldwide, deepening the Great Depression and causing a breakdown in global trade. It's also a historical fact that tariffs were once a primary tool for the US, used to nurture young industries and fund the government before income tax became the norm.

Exhibit 2: Recently announced tariffs take the US back to levels last seen in the 1930s

Source: Deutsche Bank, Historical Statistics of the United States, St Louis Fed Note: The red dot accounts for existing tariffs on China, and assumes 25% tariffs on Canada & Mexico without rollbacks or exemptions

Exhibit 3: Tariffs have historically also played a role as a fiscal revenue driver in the US

Source: Deutsche Bank, Historical Statistics of the United States, St Louis Fed

Why the Renewed Focus on Tariffs Now?

Recent US policy, particularly under the Trump administration, has moved away from the long-standing free-trade consensus. New tariffs have been implemented, and there's discussion of more, including "reciprocal tariffs" intended to match the import taxes other countries impose. What's behind this shift? Key factors include:

• Trade Deficits: A primary objective is to reduce the gap between imports and exports, especially with major trading partners like China, the EU, Mexico, and Vietnam.

Exhibit 4: US trade deficit with other countries

Source: US Census Bureau, Haver Analytics, Deutsche Bank Note: Relative trade imbalance calculated as (exports – imports)/(exports + imports)

• Domestic Industry Concerns: There's a narrative that globalization has negatively impacted US manufacturing jobs and industries.

Exhibit 5: US manufacturing base has eroded in the 21st century

Source: Deutsche Bank, UN Industrial Development Organization

• National Security: In an era of increasing geopolitical competition, particularly with China, concerns about relying on other nations for critical technologies and goods have grown.

• "Fairness" Arguments: Some policymakers argue the global system has become unfair to the US, citing practices like VAT refunds that benefit foreign exporters.

• Energy Independence: The US shift to becoming a major energy producer reduces its reliance on energy imports, potentially providing more leverage in trade negotiations.

Exhibit 6: Renewed energy independence may be helping embolden US disengagement from trade

Source: Deutsche Bank, US Energy Information Administration

Potential Economic Fallout from Rising Tariffs

Economic modeling by economists at Aston University in the UK suggests that escalating tariff conflicts could significantly disrupt the global economy. Here are some potential consequences relevant to the broader economic outlook:

• Reduced Trade Flows: Higher tariffs generally lead to less buying and selling between countries. Studies suggest potential drops of 30-40% or more in trade volumes under widespread retaliatory scenarios. A global tariff conflict could potentially slash US exports by over 43%.

• Slower Economic Growth: The combination of reduced trade and higher prices acts as a drag on economic activity, impacting real incomes and GDP growth. Worst-case estimates from some analyses suggest a potential $1.4 trillion hit to the global economy and a 2.5% reduction in US real income per capita.

Exhibit 7: How an escalating trade war could impact the global economy if all impacted countries retaliate with equal 25% tariffs

Source: Du/Shepotylo (2025), Aston Business School. *Real income per capita (net of inflation)

• Inflationary Pressures: Tariffs increase the cost of imported goods, which often translates to higher prices for consumers and businesses. Widespread tariffs could lead to noticeable inflation, potentially hitting the US hardest if it imposes broad tariffs that trigger retaliation.

Exhibit 8: Inflationary impact

Source: Du/Shepotylo (2025), Aston Business School. *10% on Canada energy and extra 20% on China

• Supply Chain Disruptions: Modern manufacturing relies on intricate global supply chains. Tariffs can break these links, causing significant problems. Industries with highly integrated cross-border operations (like autos between the US, Canada, and Mexico) or specific dependencies (like Ireland in pharmaceuticals, South Korea in autos) could be particularly vulnerable.

• Increased Uncertainty: Unpredictable trade policies make it harder for businesses to plan. This uncertainty can lead them to postpone investment and hiring decisions, further dampening economic growth.

Exhibit 9: Trade policy uncertainty is at record levels due to the confusion around tariffs and retaliatory measures

Source: Deutsche Bank, Haver Analytics, Matteo Lacoviello

The Key Players Shaping Trade's Future

The path forward for global trade depends heavily on the strategies and reactions of major economic players:

• United States: The current direction suggests continued focus on protectionism, efforts to encourage domestic manufacturing ("re-industrialization"), and potentially using its energy production strength as a negotiating tool.

• China: Despite friction, China has strong incentives to remain deeply engaged in global trade. It needs to import resources (like food and energy), find markets for its vast manufacturing output, and expand its global influence. It may increase its trade focus on developing nations (the "Global South"). We might also see trade routed through third countries (like Mexico or Vietnam) to navigate direct US-China tariffs.

• Europe: Trade is fundamental to the EU. It will likely work on strengthening trade within Europe, pursuing deals with other global regions, and managing the challenges of US tariffs and competition from China, perhaps by encouraging foreign investment and production within its borders.

• Global South (Developing Nations): Many emerging economies still see trade as crucial for growth. However, they face a tougher global environment if trade slows or fragments. Their prospects could depend on whether they attract manufacturing investment shifting from places like China, or primarily become markets for other countries' surplus goods, potentially hindering their own industrial development. The world might see trade patterns reorganizing along geopolitical lines.

Exhibit 10: Trade may bifurcate into geopolitical blocs

Source: Deutsche Bank, Haver Analytics (IMF DOTS) Note: the Global East is primarily comprised of China and Russia; the Global West includes US, most of Europe, Aus/NZ, Developed Asia; the Top 20 countries are included in the Global South with the five largest being Mexico, India, UAE, Vietnam and Turkey. The analysis covers 87% of total trade.

The Bottom Line

The assumption of stable, ever-expanding global trade is being challenged – not just in headlines, but in how the global economy functions. The rise of tariffs, driven by significant US policy shifts and complex geopolitical factors, signals a move away from the predictable, US-centric trade order of the past few decades. Economic analyses point towards potential headwinds like slower growth, rising inflation, and supply chain realignments. Simultaneously, other major players like Europe and China are adapting their own strategies within this evolving landscape.

What we're observing appears to be more than just temporary friction. With persistent trade tensions, diverging national economic policies, and a shifting geopolitical map, the flow of goods, services, and investment is starting to sketch out a new global economic reality – one potentially less dominated by old assumptions and more characterized by regional adjustments and multipolar dynamics.

What Should Investors Do?

At Israilov Financial, we believe navigating market shifts requires careful analysis, not knee-jerk reactions. But it's crucial to pay attention when the fundamental economic story starts changing, as it seems to be with global trade.

If your investment strategy hasn't accounted for a world with potentially higher trade barriers, more volatile supply chains, and shifting economic centers of gravity, it might be time for a review. This isn't about abandoning successful strategies, but rather about stress-testing your portfolio. Are you overly concentrated in sectors heavily reliant on specific global supply chains? Have you considered how shifting trade patterns might affect different geographic markets or currency exposures? Where might new risks – and opportunities – emerge in this less predictable environment?

The global economic picture is getting more complex, potentially riskier, but also presenting new avenues for those prepared to look deeper.

It’s no longer sufficient to focus solely on domestic markets without considering the global trade dynamics influencing them.

It’s about understanding how these major shifts in trade policy and economic relationships create specific risks and potential opportunities across different sectors and regions.

And that’s where we can help.

Curious how these evolving trade trends might influence your financial goals?

Let’s talk. Book a free introductory call with us.

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