President Donald Trump’s return to the White House has thrown the global trade system into disarray. Leaders have rushed to secure deals with Washington. Average US tariffs have leaped from 2% last year to close to 16%, a level last seen in the 1930s. The new regime will create many losers, few winners.
Further seismic shifts are possible. We consider three scenarios: a détente with China, an all-against-China alliance and the emergence of “Fortress North America.” For each we assess how small open economies—the orphaned children of the rules-based trade order—can navigate a path through the great-power rivalries that threaten their prosperity.
The most extreme outcome arrives if the world unites against China’s exporting of overcapacity. Our models point to a 4% hit to the country’s gross domestic product by 2030. Across the scenarios, losses for the US are limited to less than 1% of GDP, reflecting the resilience of an economy that remains the biggest in the world and among the least dependent on trade.
For small open economies such as those of Singapore, South Korea and Switzerland, taking the high road—avoiding retaliatory tariffs or joining tariff coalitions—delivers the least-bad outcomes. If the US and China break off relations and small open economies can fill in the missing links in the supply chain, they may even be marginally better off than in a free-trade world.
The pendulum in the US has swung from free trade to protectionism. For some products, the hike in tariffs is vertiginous: an extra 50% on Indian clothes and Brazilian coffee and 60% on Chinese aluminum. Indeed, it’s Brazil, China and India that stand out, slammed with additional duties layered on top of sectoral and reciprocal tariffs.
Some countries have done better. Mexico and Canada remain largely shielded under USMCA carve-outs. The European Union and Japan, despite running big trade surpluses with the US, struck deals almost as good as the one secured by the UK, which runs no surplus and has stronger diplomatic ties to the US.
Several small open Asian economies—including Malaysia, Thailand and Vietnam—have struck trade agreements with the US but still face steep reciprocal tariffs of about 19%-20%. South Korea secured a more favorable deal but at the cost of major investment pledges. Switzerland faces one of the highest rates among US partners, at 39%.
This patchwork of tariffs in place as of Oct. 20 means that US importers would face a duty of 16% if they were to purchase the same goods from the same partners as they did in 2024, up from just above 2%. This has wide implications. Using a model of global trade deployed by the World Trade Organization, we expect US imports to fall 18% by 2030, with a near-70% plunge in imports from China. Canada and Mexico, sheltered from higher tariffs, are well-placed to weather the storm.
Over time, economies will adjust. Exporters will find other markets and rely more on domestic consumers. Even while facing a large drop in US exports, China’s GDP is down only 0.3% by 2030. By pulling away from global trade, the US could be the biggest loser, with a GDP hit of 0.7% by 2030. Any gains in domestic manufacturing are likely to be outweighed by losses in services and higher input costs, leaving the economy worse off overall.
Where To From Here
With the tariff dice still rolling, the game isn’t over yet. The US continues to engage with Beijing the future of their trade relationship. The EU is figuring out its response to Chinese overcapacity. USMCA renegotiation looms. The legal basis for the current tariffs is in question, investigations into sectoral tariffs continue, and Trump relishes tariffs as an all-purpose foreign policy instrument.
To assess the risks, we set out three scenarios:
• Détente with China: The US drops the 20% fentanyl-related tariff on China but maintains sectoral tariffs and a 10% reciprocal rate. All other tariffs are unchanged.
China alone: As overcapacity from Beijing’s industrial policy spills out, the rest of the world imposes tariffs. China retaliates. • Fortress North America: The US, Mexico and Canada for a closer bloc, dropping tariffs on one another but raising them against all others. Everyone else retaliates.
The economic implications vary sharply. In the détente scenario, lowering tariffs on China reduces the hit to US GDP to 0.5%. China is substantially better off, losing only around 10% of its exports to the US. Should the world unite against China’s overcapacity, the US again limits its GDP drag to 0.5%. But China takes a far bigger hit, losing as much as 4% of GDP by 2030.
In the Fortress North America scenario, despite avoiding US tariffs, Canada and Mexico emerge as the biggest losers, with GDP down about 1% by 2030. China also suffers as its tariff-free back door into the US through Canada and Mexico shuts.
How Smaller Players Navigate the Chaos
For small open economies—those deeply tied into global supply chains, yet lacking leverage against larger players—the trade war is a challenge. We model how economies in the Association of Southeast Asian Nations, plus Taiwan, South Korea, Switzerland, Norway, Iceland and the UK fare under the scenarios detailed above.
In the status quo, many small open economies haven’t secured deals as good as the EU’s and Japan’s. Even so, the absence of US tariffs on semiconductors, electronics and pharmaceuticals benefits them disproportionately. Losses are noticeable but not disastrous.
If the US backs off China, the removal of the fentanyl tariff could deepen losses for small open economies. That’s because many are otherwise well placed to capture US market share lost by China, especially in electronics.
Should the world turn against China, joining the coalition risks losses close to 1% of GDP for Asian economies that are closely linked to Beijing. Refusing to join and avoiding Chinese retaliation could yield better outcomes, including modest GDP gains, if countries position themselves as intermediaries between China and the rest of the world. But that strategy carries the risk of US retaliation.
In a Fortress North America situation, similar to the status-quo tariffs, small open economies can mitigate the losses by not retaliating and remaining open among themselves.
In each case the small open economies do better if they reduce frictions among themselves and refuse to join the race-to- the-bottom in the global trade war. For the orphaned children of globalization, thriving in the new global order will require agility, diplomatic smarts and luck.
Source Name : Economic Times