Will the world trading system survive Trump’s tariffs?

Alan Wm. Wolff, Senior Fellow at the Peterson Institute for International Economics (PIIE)

March 27, 2025

April 2 is President Donald Trump’s tariff announcement day. There has been no clear indication of what additional tariffs the United States will impose, although the anticipation is that they will be substantial and far-ranging. An additional unknown is the extent to which other countries will retaliate. Those engaged in world commerce and the government officials who are responsible for trade policy will be moving their planning from “what if” to “what now.”

The new US administration, in what it calls its “Fair and Reciprocal Plan,” clearly does not recognize any international constraints on what tariffs it will impose. The commitment that 166 members of the World Trade Organization (WTO), including the United States, made in joining the organization is the exact opposite: Tariffs are contractually bound at stipulated levels, with narrow exceptions. The signatories also agree to assure nondiscrimination, treating all trading partners the same (unless it is to give preferential treatment to a country with which it has a free trade agreement, for the most part with no tariffs at all). These are the bedrock conditions that have governed most of the world’s trade since January 1, 1948, when the United States led the world’s then principal trading nations to establish the General Agreement on Tariffs and Trade (GATT), the precursor of the WTO.

One way to think about the pre-April 2 world trading system is that, for goods, it is much like the traffic laws every country has governing the movement of automobiles and trucks. Pedestrians and drivers have a reasonable expectation that all drivers will obey stop signs (although some degree of personal attention is still warranted). For trade, there is the clear expectation that the tariff that is applied next week will be at the same level as that which existed yesterday. Businesses depend on the certainty that existing tariff commitments provide, and they plan and invest accordingly. Under Trump’s plans, there is no guarantee that the US tariffs in effect on any given day will not be superseded by other US tariffs on any subsequent day. Uncertainty will reduce the amount of trade that takes place. (For estimating the costs of uncertainty on trade, see: “The Heterogeneous Effects of Uncertainty on Trade”, Ibrahim Nana, Rasmane Ouedraogo, and Sampawende Jules Tapsoba WP/24/139, IMF, July 2024.)

World trade will adapt to American trade restrictiveness, even if there are costs for the world economy. The US share of world imports is important but not dominant. The United States accounts for 13.2 percent of world imports and 8 percent of world exports. US tariffs and the trade hostilities they provoke can be anticipated to reduce these shares. The economic impact will depend on the height of the US tariff wall, how many countries it applies to, and its expected duration. Added to this will be the degree to which there is foreign retaliation, which can increase the bilateral economic harm caused by the original US tariffs. Another short-term effect will be other countries seeking to limit the adverse impact of trade from China and other sources diverted from the US market.

There are potential longer-term effects as well. During the last two US administrations, there was anecdotal evidence that those engaged in trade with the United States have been experimenting with decreasing their reliance on China for goods. After the April 2 tariff day, foreign sellers may similarly reduce their reliance on the US market because of the uncertainty of future US market access. For example, Canada has long wished to diversify its trade away from the United States. In fact, since 2018 Canada’s trade minister has been officially the Minister of International Trade Diversification. China likewise has been seeking to diversify its trade away from its rival, the United States.

One other movement away from the WTO rule of nondiscrimination deserves mention. Will countries seeking to reach a settlement with the United States to obtain partial or complete removal of new tariffs give trade concessions applicable to the United States alone and not others (e.g., the EU potentially lowering its tariff on only US autos from 10 percent to 2.5 percent to match the normal US tariff)?

A key question for the durability of the world trading system is whether the abandonment of tariff commitments by the United States and by those who retaliate or reach settlements can be limited to bilateral trade with the United States. Will retaliation be against the United States alone or take the form of broader trade restrictions?

Of course, it is possible that America’s trading partners will act with greater restraint than the United States in applying tariffs by under-retaliating or providing unreciprocated concessions. There are many reasons why this might occur: Europe still needs the engagement of the United States in its relations with Russia, particularly being on Ukraine’s side to the extent possible to achieve peace. Japan and Australia need the US presence in Asia. All of America’s trading partners will want to reduce the self-harm and damage to the world economy that would occur from matching what they will likely see as intemperateness on the part of the United States in applying its new tariffs.

What is the future for the WTO, for the rules of the world trading system, of which the WTO is the custodian? The WTO has known deficiencies. It requires a number of key reforms. Nevertheless, the correct response for whether the WTO is relevant is that it is of vital importance to keep it in place. There is no clear alternative. Thanks to some very wise individuals who 80 years ago created a more peaceful and prosperous world after two world wars, they created a trading system based on binding reciprocal tariff commitments, nondiscrimination, and transparency.

There is cause for a degree of optimism that WTO members are each very likely to largely maintain their commitments—outside of their near-term dealings with the United States. The coming trade war will be a limited war. This is due, in part, to a combination of their political commitment to the WTO, a belief that their countries would be much worse off without the world trading system, and a wish to keep open the possibility that the United States recommits to the WTO’s rules in the future. For these reasons, the trading system will endure. As one sharp critic of the system once acknowledged, “If the WTO did not exist, we would have to invent it.” The leaders of the world’s trading countries and their trade ministers should add, “These are the rules we will live by until we invent something better.”