By: Marta Bengoa
The global economy braces for fresh turbulence as U.S. president Donald Trump's administration launches its most aggressive trade offensive yet. This marks a stark departure from established international commerce norms and international trade agreements. The February 1st Executive Orders (EOs) imposed sweeping tariffs on major trading partners, signaling an unprecedented escalation in America's protectionist stance. It will affect around $1.3 trillion worth of trade if implementation gets into effect — Trump has announced a one-month pause on Mexican tariffs.
The newly announced measures — 25% tariffs on Canadian and Mexican imports, 10% on Canadian oil, and 10% on Chinese goods — represent a dramatic expansion from Trump's previous term. Between 2017 and 2021, Chinese imports faced average tariffs of 13.7%, affecting $370 billion in trade.
This broadside against the global trade architecture arrives as the world economy remains entangled in complex supply chains built over decades. The previous U.S.-Mexico-Canada (USMCA) agreement, involving the renegotiation of the North American Free Trade Association (NAFTA) during Trump’s first term, had already introduced frictions through more stringent rules of origin, requiring 75% North American content in automotive manufacturing. The new regime threatens to fracture these established networks entirely.
The ripple effects of this new global order are already visible across the developing world, creating an intricate tapestry of winners and losers. Vietnam, which emerged as a primary beneficiary of the first Trump-era trade war, recorded a remarkable 40% surge in U.S.-bound exports. Bangladesh and Malaysia similarly capitalized on the disruption, with Bangladeshi textile exports climbing 15% and Malaysian electronic component shipments rising 22%.
Yet the picture darkens for commodity-dependent economies. The tariff-induced slowdown in Chinese industrial activity has sent shockwaves through resource markets, with Chilean copper exports plummeting 18%, Brazilian iron shipments declining 12%, and Indonesian coal exports contracting 15%. These figures paint a stark portrait of global trade's interconnectedness — and its vulnerabilities.
India stands uniquely positioned in this shifting trade landscape. As the world's fifth-largest economy, it could emerge as a significant beneficiary of trade diversion from China, particularly in sectors such as pharmaceuticals, textiles, and IT services. The country's robust domestic market and established manufacturing base make it an attractive alternative for companies seeking to diversify their supply chains away from China. However, India's commodity imports, particularly oil and industrial metals, could face upward price pressures as global supply chains reorganize. The country's technology sector, which has deep ties with both U.S. and Chinese markets, will need to navigate carefully through this period of heightened trade tensions. As a starter, India just announced significant duty cuts that will favor exports from the United States (for motorbikes, ethernet switches, and fish hydrolysate — just to name a few products), which is already signaling a policy shift.
The World Bank's projections suggest that the expanded tariffs could take away 0.5% from global GDP growth while triggering a 2.1% contraction in international trade volumes. Perhaps most concerning for developing nations is the projected 3.2% decline in foreign direct investment flows, threatening to starve emerging economies of crucial capital development. Regional disparities in impact appear inevitable. Latin America faces a potential 1.1% GDP reduction as Chinese demand will inevitably shrink, while Southeast Asia could experience a manufacturing renaissance, with optimistic forecasts suggesting up to 2% GDP growth over the next five years. Africa's trajectory remains uncertain, though its vast reserves of rare minerals could prove crucial in a reorganized global supply chain.
For American consumers, the consequences of tariff implementation will likely manifest in their daily lives through higher prices for essential goods. The tariffs threaten to increase costs across a spectrum of products: from aluminum and nickel to plastics and petroleum. Mexican agricultural products (avocados, strawberries, seeds, etc.) and automotive components, deeply embedded in American supply chains, will face new barriers, potentially driving up consumer costs and disrupting manufacturing production.
The policy shift is a major one, and it is not going to reduce the bilateral trade deficits either as those depend on macroeconomic fundamentals (excess of investment over savings in the U.S. economy). If tariffs are finally implemented, the exchange rate of the United States will appreciate contributing to widening the deficit. Additionally, the policy raises significant questions about the United States’ reliability as a trading partner and ally. The arbitrary nature of the tariffs introduces a new element of uncertainty into business planning, potentially dampening investment in U.S.-oriented production capacity. This could lead to job losses in American manufacturing, even as the policy aims to protect domestic industry, creating the opposite effect intended.
As the global economy adapts to this new reality, developing nations face a critical juncture. Success will hinge on their ability to navigate the shifting trade landscape while maintaining competitive advantages. Some will find opportunities in the disruption, particularly those positioned to absorb manufacturing capacity seeking exodus from China. Others, especially commodity exporters, may need to accelerate economic diversification efforts to mitigate their vulnerabilities.
The unfolding scenario suggests a period of significant economic realignment ahead. While the full implications of Trump's latest trade offensive remain to be seen, one thing appears certain: the global trading system is entering uncharted waters, with consequences that will reverberate far beyond the targeted nations.
Marta Bengoa is a Non-Resident Fellow at ORF America.