The overall impact of Trump’s actions may only represent a modest shock to the rest of the world, primarily because the US budget and trade balances are likely to widen due to the fiscal stance, which will boost US demand relative to output. However, there could be significantly different relative impacts on other countries. Ultimately, the final outcome will depend on whether the rest of the world magnifies or dampens these effects.

The spate of recent “trade deals” done by the US does not stabilise the world trade system; rather, it creates ongoing uncertainty. It’s not like 1931 when the Smoot-Hawley tariffs dramatically increased tariffs on all suppliers across the board simultaneously as US aggregate demand was collapsing, sending a huge macro-economic shock across the world. The US was the world’s biggest importer, and other countries worsened the situation by raising protectionist barriers against one another, e.g. the UK Tariff Act of 1932. Even though the new Trump tariffs are nearly as high as those of the Smoot-Hawley Tariff Act, the US accounts for only about 15% of world imports. At the same time, Trump is cutting taxes (on the rich) in a manner that is very likely to increase the budget, aggregate demand and the current account deficit. Global aggregate demand remains healthy.

In 2018, his tariffs were mostly directed against China and were significantly offset by a reshuffling of trade among other states. This time, the new tariffs will hit everyone, but in a discriminatory way. Some emerging markets, such as Vietnam and Cambodia, are likely to suffer severely due to high US tariffs as well as their dependence on the US market, whilst finding it hard to readjust trade flows. China will find the shock much more manageable given its diverse export structure and scope for raising domestic demand. The biggest impact of the Trump measures could be on the relative competitiveness of other countries and their dependence on the market. Canada and Mexico are estimated to be among the worst hit. The significance of the “deals” will depend on the degree of discrimination they create.

The world trade system has lost the element of predictability that the WTO once provided. The willingness of countries to sign “deals” with Trump (despite not reaching the 90 agreements he boasted about by August 1) shows a preference to give in to his bullying rather than create a common front against the US, even if many of the US “wins”, e.g. on investment, are unenforceable.

The UK’s willingness to give the impression of ready acquiescence to Trump has set a bad precedent. Whilst Starmer’s intentions were signalled in advance and priced into the May 19th UK-EU outline deal, this move did not help improve the UK’s relations with the EU.

The inability of the EU and China to reach a common position does not bode well for the future of the system. More than ever before, the Chinese press is acknowledging the desirability of increasing domestic demand. However, there is not enough trust in this promise to induce the EU to reduce its vigilance against the risk of what economic historians call “distress goods”, (goods in oversupply due to market closure) from threatening EU markets. Macro-economically, the threat comes from a multiplier impact being generated by contagious protectionism in a world where the old rules are, if not dead, seriously dormant.

The final impact of the Trump trade shock will depend on whether other countries’ actions dampen or magnify the initial shock: for instance, by cutting demand or raising tariffs across the board to cut imports. So far, this has not happened, as was the case in 2018. However, the new equilibrium is fragile.

Many aspects of Trump’s trade deals or promises are not enforceable, particularly concerning investment. Some elements remain incomplete, which creates a huge degree of uncertainty. The risk premium on investment, especially in the US, has risen, and with increasing corporate debt, the global financial risks associated with Trump’s actions are substantial.

As of July 29, 2025, Matthew C. Klein argued that the US is not winning the Trade War it started[1]  and that “there was no escalatory spiral after all.” We must hope he remains correct.

Footnotes

[1] Matthew C. Klein, The U.S. Is Not “Winning the Trade War”, The Overshoot, Jul 29, 2025.