The New Era of Protectionism: The Tariff War That Redrew Global Power
Council of foreign relation
April 2, 2025, will be remembered as the day the United States voluntarily dismantled the economic order it painstakingly built after 1945. With the stroke of a pen, the Trump administration imposed sweeping tariffs on over 180 countries, branding it "Economic Liberation Day." This was no ordinary protectionist measure but a fundamental assault on the principles of global economic integration that had defined the post-war era. Simultaneously slapping China with an additional 34% tariff at the beginning, Trump raised additional tariffs to 84% on April 9 and has since increased that to 125%, bringing the total tariffs on Chinese goods exported to the U.S. to 145% (pushing total duties above 50%) while hitting traditional allies like the EU, Japan, and India with punitive rates, America was not just targeting competitors. iIt was declaring war on the very concept of globalization that had propelled worldwide prosperity for decades. The U.S. stock market downfall forced Trump to shelve the tariffs for 90 days, leaving only those on China. The move sent shockwaves through international markets and diplomatic circles, marking what many analysts see as the beginning of a new, more fragmented economic era.
The Logic of Disruption
The White House's economic justification that persistent trade deficits amounted to an "implicit tariff" unfairly imposed on America was immediately dismissed by economists across the political spectrum as fundamentally flawed. While he framed his argument using Greek symbols to suggest complexity, the underlying calculation is actually quite straightforward. The method involves taking the trade deficit, dividing it by total imports, and expressing the result as a percentage, yielding figures like 39% for the EU or 67% for China. He then halves these percentages to emphasize his supposedly "generous" approach, rounding them to approximately 20% for the EU and 34% for China. Yet beyond the technical arguments, the political message was unmistakably clear: the United States would no longer serve as the open, welcoming market that had fueled global growth since World War II. While China bore the brunt of the measures, the EU found itself facing 20% tariffs on its critical auto and aerospace sectors, Japan saw 15% levies imposed on its electronics exports, and presently, India imposes a 10 percent tariff on pharma imports from the United States. Only the nations of South America escaped major penalties, instantly transforming countries like Brazil and Argentina into potential sanctuaries for multinational companies seeking tariff-free production hubs to serve global markets. This selective punishment revealed a calculated strategy to divide the global economic order along new fault lines.Trump imposed tariffs across the board, even on Pacific nations with which the US has a virtually non-existent trade deficit. Trump doesn't seem to understand that bilateral trade deficit is not what matters. Multilateral trade deficit is more important. That is, we can have a trade surplus overall while having a trade deficit with certain countries.
Europe's Precarious Tightrope
For the European Union, this dramatic shift in U.S. trade policy presents both existential risks and unexpected opportunities that will test the bloc's unity and strategic vision. The immediate challenge comes from multiple directions, requiring careful navigation between competing priorities and threats. The most pressing danger stems from China's predictable reaction to being shut out of American markets. With U.S. markets suddenly closing, Chinese manufacturers will look into setting minimum prices on electric vehicles,whereas EU producers traditionally struggle to compete on price alone. German industry, a major exporter to the world's top economy, sector leaders said, with one institute putting the expected damage at 200 billion euros ($222 billion), with the automotive and renewable energy sectors particularly vulnerable. This looming threat has sparked intense debate within EU institutions about how to balance open markets with the need to protect strategic industries.
Yet, within this crisis lies potential for European reinvention. The EU is beginning to leverage several structural advantages that could position it as an unexpected beneficiary of the global trade realignment. First is the remarkable flight of investment capital from turbulent U.S. markets to relative European stability. With Wall Street rattled by Trump's erratic policies and the Federal Reserve struggling to contain inflation, European bond markets absorbed an astonishing amount of redirected capital during just the first quarter of 2025 alone. This capital inflow is providing crucial liquidity for EU governments and corporations alike. Second, the bloc is accelerating its long-term strategy of trade diversification, fast-tracking agreements with ASEAN nations and finally moving to implement the long-stalled EU-Mercosur deal while negotiating a groundbreaking tech pact with India that aims to bypass U.S. semiconductor controls. Third, and perhaps most significantly, Europe is flexing its unique regulatory power through mechanisms like the Carbon Border Adjustment Mechanism (CBAM), which effectively forces foreign firms to either localize production within the EU or face substantial financial penalties when exporting to the bloc's consumers. These combined advantages give Europe tools that other economies lack when navigating the new trade landscape.
A Fragile Truce Emerges
The trade war took an unexpected turn on April 10, 2025, when President Trump abruptly announced a 90-day pause on his controversial "reciprocal" tariffs, a move that came mere hours after the EU had formally approved retaliatory measures targeting $23 billion worth of U.S. goods. European Commission President Ursula von der Leyen offered cautious approval of this development, characterizing it as "an important step toward stabilizing the global economy" while simultaneously announcing that the EU would implement a parallel pause on its countermeasures. However, this temporary de-escalation comes with important qualifications that reveal how fragile the truce really is. Most significantly, the most damaging U.S. tariffs, the 25% duties on EU steel and aluminum exports and the separate 25% levy on automobiles and auto parts, remain fully in effect. The EU has made clear that it retains the unilateral right to reinstate retaliatory tariffs should negotiations fail to produce satisfactory results. Von der Leyen reiterated her consistent call for a comprehensive "zero-for-zero tariff agreement" between the transatlantic partners, emphasizing her view that "tariffs are taxes that only hurt businesses and consumers" in both economies.
Beneath the surface of European unity, however, significant divisions are becoming increasingly apparent. In Germany, Chancellor-in-waiting Friedrich Merz framed Trump's surprising pause as a direct response to European resolve and coordination while simultaneously warning about the growing economic costs of the trade conflict. "Trump is currently seeing the problems of his tariff policy at home," Merz observed, pointing to spiking U.S. inflation numbers and collapsing import figures as evidence that the policies were backfiring. His proposed solution—a complete elimination of transatlantic tariffs—reflects the German export economy's traditional preference for open markets. Meanwhile, Greek Prime Minister Kyriakos Mitsotakis struck a notably different tone in comments to Breitbart News, emphasizing his country's special relationship with Washington and his personal ability to work with President Trump on regional security issues. This stark contrast between northern and southern European perspectives highlights the difficult balancing act facing EU trade negotiators as they attempt to maintain a united front while accommodating diverse national interests.
The Domino Effect Across Global Markets
Despite this temporary pause in hostilities, the global economic landscape continues shifting at an accelerating pace as nations and corporations scramble to adapt to the new reality. Perhaps most strikingly, historic Asian rivals such as China, Japan, and South Korea have held unprecedented trilateral summits to coordinate their responses, particularly regarding export controls on rare earth minerals and advanced battery materials sectors where all three nations wield significant influence. In South Asia, India has made its most dramatic geopolitical shift in decades, abandoning its traditional non-aligned stance to join the Russia-China-led International Payment System as a deliberate strategy to circumvent potential U.S. dollar sanctions. Even more consequentially, Saudi Arabia's landmark decision to price a part of its oil exports in Chinese yuan rather than U.S. dollars represents the most significant challenge to dollar dominance since the 1971 Nixon shock, potentially reshaping global energy markets and financial flows for decades to come. State oil firm Saudi Aramco (2222.SE) opens a new tab that will ship about 48 million barrels to China in May, a tally of allocations to Chinese refiners showed, up from April's 35.5 million barrels.
These rapid realignments suggest that the global economic order is undergoing changes far more profound than simple tariff disputes.
Economic Collateral Damage Mounts
The immediate economic consequences of the trade war are becoming increasingly visible across multiple sectors and regions. In the United States, consumer prices have jumped year-on-year as Chinese imports suddenly vanish from store shelves, with electronics, clothing, and household goods seeing the sharpest increases. The automotive sector has been particularly hard hit, with BMW forced to halt production at its massive South Carolina plant when EU retaliatory tariffs made the import of German-made engines financially unviable a vivid illustration of how modern supply chains defy simple protectionist solutions. Financial markets have reacted with similar alarm, with Europe's Stoxx 600 index suffering a 10% decline in April 2025, its worst monthly performance since the pandemic panic of 2020, while U.S. Treasury yields spiked dramatically as foreign buyers retreated from dollar-denominated assets. These market gyrations reflect growing investor recognition that the foundations of global commerce are being fundamentally rewritten.
The Deeper Strategic Fracture
What makes the current conflict qualitatively different from previous trade spats is that it represents not just economic competition but a clash of fundamentally incompatible visions for how the global economy should function. The United States under Trump has embraced what might be called "fortress capitalism," a combination of "Made in the USA" production mandates, a 10% baseline tariff on all imports, and deliberate decoupling from perceived rivals. While politically popular in certain constituencies, this approach risks locking American industry into higher-cost, lower-productivity patterns reminiscent of the 1970s. China, meanwhile, is advancing its "dual circulation" strategy that combines the ruthless pursuit of technological self-sufficiency (exemplified by SMIC's breakthrough in 5nm semiconductor manufacturing) with aggressive expansion of Beijing-centered economic networks through initiatives like the Belt and Road Initiative. Caught between these two visions, the EU is attempting to chart a third way it calls "open strategic autonomy," simultaneously defending critical industries like Airbus and ASML while maintaining commitment to multilateral rules and open markets. Whether this middle path proves sustainable as the world fractures into competing blocs remains perhaps the central question of contemporary economic statecraft.
Why This Trade War Is Different
While trade tensions between the U.S. and China have simmered for years, several structural factors make the current conflict uniquely dangerous and potentially irreversible. First is the dramatic progress of technological decoupling, exemplified by Huawei's shocking 2024 breakthrough in developing 7-nanometers chips without access to Western equipment, proof that China can indeed innovate around containment strategies. Second is the growing militarization of trade policy, with the Pentagon now explicitly linking export controls to national defense readiness in ways that make compromise politically toxic in Washington. Finally, and perhaps most consequentially, the institutional framework that once mediated such disputes lies in ruins. The WTO's Appellate Body remains paralyzed, leaving no credible referee to arbitrate conflicts or enforce rules. Together, these factors suggest we are witnessing not a temporary dispute but the birth of a new, more divided economic era.
Conclusion: Navigating the New Abnormal
The "Economic Liberation Day" fantasy that trading partners would quickly capitulate to U.S. demands has collided with complex global realities. While the EU's 90-day pause offers a glimmer of hope for a diplomatic resolution, Trump's inflammatory rhetoric, including claims that the EU was "created to screw the U.S." and blatant misrepresentations of Europe's 2.7% average tariff as 39%, suggests deep ideological barriers to meaningful compromise. Three plausible scenarios now confront European policymakers. A comprehensive U.S.-EU zero-tariff deal could theoretically stabilize transatlantic trade, but Trump's obsessive focus on "reciprocity" and innate distrust of multilateralism make this outcome improbable. More likely is permanent fragmentation, with the EU deepening ties to Asian and South American markets while gradually decoupling from an increasingly protectionist America. The worst case would be a systemic collapse, a downward spiral of retaliations that the OECD projects could shrink global trade volumes, with Europe suffering disproportionate damage as the two superpowers retreat into self-sufficient fortresses.