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The Trump shock has sent the global trading system into a knockdown. A key question for the global economy is how and in what condition it will emerge from the tariff chaos. Natalya Volchkova, NES Professor and Vice-rector for Research at the Russian Foreign Trade Academy, Maxim Medvedkov, Adviser to the WTO Expertise Center and former Chief Negotiator for Russia's accession to the WTO, and Peter Varyushin, Head of commodity markets research at Norilsk Nickel, discussed this topic during the NES Popular Science Days in memory of Gur Ofer, New Economic School’s co-founder. GURU summarizes the main ideas from their talk and future scenarios that economists consider.
For the most part of human history, trade relations were based on «not so much justice as force.» The state of things changed after World War II: a multilateral trading system emerged, contributing to 80 years of unprecedented economic growth, says Anne Krueger, former World Bank Chief Economist and First Deputy Managing director of the IMF, and now a Professor at Johns Hopkins University. Now the force is becoming dominant again. During his first term at the White House, Donald Trump launched a trade war with China, Joe Biden maintained those restrictions, and now Trump is unleashing a global trade war. «The global economic system under which most countries have operated for the last 80 years is being reset, ushering the world into a new era,» IMF Chief Economist Pierre-Olivier Gourinchas notes.
According to the IMF calculations, after a series of tariff increases, the US effective tariff rate surged past levels reached during the Great Depression (which contributed to the spread of the crisis a century ago), and counter-responses from major trading partners significantly pushed up the global rate. The world seems to be returning to the mercantilist era, when international trade was seen as «a zero-sum game where one's gain was achieved only at the expense of the other's loss,» NES Professor Natalya Volchkova suggests.
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Sources: Haver Analytics; PIIE; Refinitiv Eikon; IMF and the World Bank staff calculations.
What is happening now is reminiscent of the «Nixon Shock,» the speakers of the NES Popular Science Days note. In 1971, after rejecting the dollar's peg to gold, US President Richard Nixon started a restructuring of the monetary and financial system, but now the Trump shock could destroy the existing trading system. «The question is what will come in place of it,» Volchkova says.
Losses in a trade war can be significant. The IMF has already downgraded its global economic growth outlook compared to the January report. It was lowered by 0.5 p.p. to 2.8% in 2025 (after an increase of 3.3% in 2024), and by 0.3 p.p. to 3% in 2026. The price of the April tariff spikes is illustrated by the outlook scenario that does not take them into account: it is significantly better and suggests global GDP growth at 3.2% in 2025 and 2026. Global trade growth slowdown is expected to be even stronger. It was revised down by 1.5 p.p. compared to the January outlook, to 1.7% in 2025 after 3.8% in 2024.
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Sources: IMF, World Economic Outlook, IMF staff estimated.
Speakers of the NES Popular Science Days mentioned among the consequences of Trump tariffs an increase in inflation, a decrease in personal and business income (with the possible exception of certain industries protected by tariffs), and an increase in uncertainty that will affect business investments. The worst possible scenario is the division of the world into several blocks, while the more moderate one suggests partial fragmentation with manufacturing facilities located within countries’ own borders or in friendly countries, Volchkova argues. Most traded goods are intermediate inputs that cross borders multiple times before being turned into final products, Gourinchas explains. So firms' costs will see a snowball effect. When the corporate sector will begin to cut investments and expenses, banks will «reassess the borrowers’ exposure,» and financial conditions could tighten, Gourinchas warns. A sharp decline in oil prices is a clear manifestation of this uncertainty.
But the apocalypse scenario is not the only one and is not at all inevitable. Trump's overly aggressive actions may indicate that his goal is to force trading partners to negotiate with the United States, speakers of the NES Popular Science Days believe. The stakes are high, and it seems that the White House aims to change the trade regime that the United States now have, says Maxim Medvedkov, Adviser to the WTO Expertise Center: the tariff pause opens the way for countries to reach bilateral agreements with the US, and not only on trade issues. Volchkova agrees that Trump's overly aggressive position towards the EU, a major partner of the United States, corresponds with this scenario. Some economic theories suggest that by these actions, the United States, as a hegemon, may be trying to mobilize its allies in their confrontation with the main rival, China, Konstantin Egorov, University of Antwerp professor and New Economic School graduate, argues.
«What Trump is doing is called a false choice tactic,» Medvedkov says. »International negotiators use it very often. They say: 'We want to destroy your economy and we will do it in this and that way,' but in fact they are simply strengthening their negotiation position. And when everyone is terrified and doesn't understand how to continue their normal life, they say, 'Okay, if you want to have your normal life, let's negotiate.' The US administration expects to reach an agreement by July and, perhaps, 'everyone will get off with nothing more than a fright',» Medvedkov hopes.
«But even in the 'mild fright' scenario, the key risk will remain: a great uncertainty,» Volchkova says. Firms will avoid risks and freeze investments. «Tariffs can be taken into consideration within business plans, but uncertainty cannot,» she argues. Therefore, even if the US tariff pause announced after the Liberation Day (it did not affect China) is extended, it will not significantly change the global outlook, Gourinchas stresses. Simply because uncertainty remains.
Companies and countries will look for ways to adapt to this uncertainty. Perhaps intermediary firms will be established in trade between the United States and China, and the countries of the Global South will cluster around China, Volchkova suggests among other options in response to the current developments. But the big question remains: what will happen to the multilateral trading system and WTO rules?
For decades, the development of regional economies has been happening in the context of a global process determined by the rules of global trade. «In a sense, they were sacred, and national economies adapted to them,» Volchkova says. This system allowed «goods to move between countries, rather than staying in ports waiting for the decision of some public official,» Medvedkov notes. Multilateral trade agreements have helped countries solve a classic prisoner's dilemma: large economies have an incentive to impose unilateral tariffs to improve their terms of trade, but if all countries engage in such behavior, the result is a race to the bottom that leaves everyone worse off, renowned expert in international trade Pinelopi Koujianou Goldberg states.
However, although the rules of international trade seemed sacred, the number of those dissatisfied with them grew. It is not easy to create a system that will take into account the interests of both poor and rich countries that do not want to compromise, as a result, the WTO has reached an impasse, Volchkova said in an episode of the «Economics out Loud» podcast. «Decades of deepening trade ties fostered rapid but uneven economic growth,» Gourinchas admits. And there is also «some reason» behind the complaints of developed economies that «globalization unfairly displaced many domestic manufacturing jobs.»
These complaints have given rise to the feeling that some trading partners are profiting from others and they need to be punished. The US trade policy is now strongly inspired by the doctrine of 'reciprocity' according to which US tariffs should closely mirror those of its trading partners, Jean-Pierre Landau from Sciences Po Paris writes. While the post-war trading system was based on the assumption that countries seek to maximize their own well-being, in recent years Washington has increasingly been guided by other goals. That is to hinder the economic development of competitors, especially China, Goldberg suggests. «From this point of view, Trump's trade policy makes no sense economically, it becomes more coherent when viewed through a geopolitical lens: the purpose is not to benefit Americans but to harm others,» she notes.
It may seem that geopolitics and trade cooperation are not compatible, economists Aaditya Mattoo, Michele Ruta and Robert W. Staiger say. However, they show that this is only true if rivalry eclipses any consideration of own-country well-being. In all other circumstances, there are gains from trade cooperation even with geopolitics. Through measured adaptation to the geopolitical imperative, the WTO can continue to thrive, Mattoo, Ruta and Staiger say. In order to maintain the benefits of multilateral agreements, Krueger even suggests considering a bold option in case Trump refuses to compromise. Other countries may form a new trade alliance independent of the United States that upholds WTO principles, she says, and suggests calling it the Minus US Trade Organization (MUTO). After all, the United States accounts for less than 5% of the world's population and roughly 9% of global exports.
Perhaps Trump does not have the goal of destroying the existing system, Medvedkov says. He draws attention to the White House administration's statement that its tariff decisions comply with the rules of the General Agreement on Tariffs and Trade (GATT, the predecessor of the WTO): «This may be a clue: if Trump had been aiming for a devastating scenario, he would not have needed any justification.» The US had many claims against the WTO, Medvedkov recalls. Perhaps with the help of tariffs, Trump wants to change the situation. WTO rules, for example, allowed developing countries to protect their markets with higher import duties. Many of these countries, having become developed, do not want to give up these preferences and change their status.
The key confrontation is between the US and China. The United States was the main driver of the WTO, but China is becoming the main beneficiary of the WTO system, Medvedkov notes. And if Washington seeks to remove this imbalance and strengthen the system, then the United States and China will reach an agreement: «The attraction of these markets, the opportunities that open up for firms – both Chinese and American – can outweigh all the problems.» On April 22, Trump admitted that the tariff could come down even for China, a key rival of the US: «145% is very high. It won’t be that high, it’s not going to be that high … it won’t be anywhere near that high. It will come down substantially.»
Adam Smith showed that free trade leads to an increase in general well-being, and David Ricardo developed his ideas, proving that all parties benefit from international trade, and the gains of some increase the gains of others, Volchkova said in an episode of the «Economics out Loud» podcast about Ricardo. Tariffs are economically harmful: they raise costs for importers, divert production to higher-cost countries, discourage innovation, and foster monopolies and corruption, Krueger writes. Resources are reallocated towards the production of less-competitive items with a resulting loss of aggregate productivity and higher production prices, Gourinchas notes. The Great Depression, which was aggravated by protectionism, has shown how destructive they can be.
In certain cases, tariffs can, of course, be a tool for attracting investments, experts of the NES Popular Science Days acknowledge. They are an instrument of industrial policy and prioritization of the country's sectoral development, Volchkova explains. They can help the government deliberately «distort prices in favor of certain industries and goods.» «Tariffs allow investors to work with a guaranteed rate of return, and it will always be higher compared to when there is no tariff,» Medvedkov says. But in some sectors tariffs may function well and give benefits, while in others they may not. The effectiveness of tariffs in protection of the domestic market is not always indisputable, Peter Varyushin, Head of commodity markets research at Norilsk Nickel, adds, citing the Russian automotive sector as an example. «The import duty on passenger cars is about 50%, and a recycling tax is also charged. Still, we cannot say that we have raised great domestic car manufacturers. Tariffs should be used along with other instruments. There should be a clear policy for attracting investments,» Varyushin argues. This toolkit is simple, but controversial because of its consequences for the economy as a whole and for inflation in particular, Medvedkov says. New US tariffs against imports from China, Canada, Mexico, and the EU, imports of cars, aluminum and steel threaten large-scale disruptions in key US industries that depend on these imports, including machinery, chemicals, manufacturing of transportation equipment, economists of the Federal Reserve Bank of Richmond warned. In April, the IMF downgraded its outlook for the US economic growth in 2025 to 1.8%, 0.9 p.p. lower compared to the January estimate. Tariffs account for 0.4 p.p. of that reduction, Gourinchas writes.
Other major economies will also be hit. The outlook for China's GDP growth has been lowered by 0.6 p.p. to 4%, and by 0.2 p.p. to 0.8% in the eurozone. The least developed and poor countries are in a particularly vulnerable position, Volchkova says. Their key growth driver is access to the markets of developed countries, and it would be a terrible blow for them to lose it. While US consumers brace for higher prices, low- and middle-income countries will bear the brunt of the crisis, from currency depreciation to rising borrowing costs, Jayati Ghosh, a development economist at the University of Massachusetts Amherst, states.
Russia has also felt the effects of the possible trade war through lower oil prices. «We still have the same problem. Oil is the main source of revenue, not only for the budget, but for the country as a whole,» Volchkova says. And if the scenario of world trade fragmentation works out, it will lead to a slowdown in the global economy and a drop in demand for raw materials and commodities, including oil, she argues.
«Countries will seek to negotiate,» Medvedkov expects. The benefits of a free trading system are too great, allowing it to reduce costs and increase well-being: «I have no doubt that the EU can build an American limo, and it can be a good one. But the question is how much it will cost,» he notes. In order to preserve these benefits and ensure «the right balance between the pace of progress or globalization and addressing the associated dislocations,» policy makers must think «well beyond the reductive lens of compensating transfers between 'winners' and 'losers',» Gourinchas urges. «Unfortunately not enough has been done, pushing many to embrace a zero-sum worldview whereby the gains of some only come at the expense of others,» he admits.
