Trade Tensions, Tariffs, and the Future of Global Trade

“While world trade hit new peaks in 2024, uncertainty has increased as geo-economic tensions increase, supply chains are disrupted, and tariffs surge.” 

 

- UNCTAD, 2024

In 2025, the global trade environment is being defined by rising trade tensions and the return of tariffs as a leading economic policy weapon. As the world recovers from pandemic-related disruptions, nations are increasingly resorting to protectionism deploying national security, industrial sovereignty, and geo-economic strategy.

The New Wave of Tariffs

The governments have historically been using tariffs and non-tariff barriers as economic tools to protect their domestic industries from foreign competition or punish foreign countries. However, post-pandemic, there has been an increase in the tendency of some big economies to resort to tariffs. Global trade has been flourishing for a long time. More than sixty per cent of the global trade doesn’t attract any tariff, but the remaining trade is often subjected to very high trade tariffs and other non-tariff barriers. Agriculture, textile and dairy sectors are such areas where there are high trade barriers in the form of tariffs and non-tariff restrictions.

US Tariff Escalation: In April–August 2025, the US rolled out sweeping tariffs targeting more than 60 nations, ranging from 10% against BRICS countries to as much as 50% on certain products like steel, copper, and cars.

Retaliation and Global Reach: Large trading partners, including China, the EU, India, and Brazil, have retaliated in different ways. Countries like China have reciprocated the tariffs imposed by the US, while countries like India have refrained from reciprocal tariffs on US goods. However, the fact is that due to unilateral large US tariffs, the worldwide tariff has surpassed the levels of tariffs ever seen in the last century.

Sector-Specific Disparities: Value-added goods like apparel and machinery, which form a large share of the manufacturing value chain, are penalised with high tariffs, particularly under "tariff escalation", a policy that deters industrialisation across developing economies.

 

Average Applied Tariffs: Industry Breakdown

Global Trade Flows: Growth Meets Uncertainty

Record Values, Slowing Pace: International trade reached $33 trillion in 2024, an increase of 3.7% growth rate from 2023. Growth was led by service exports (9%), while goods trade accelerated at a lower 2%. Due to increasing geopolitical tensions and disruptions in global supply chains, the growth in global trade has slowed down.

Developing Economies: Developing nations, led by East and South Asia and particularly India, saw 4% annual growth in trade; their import/export ranked on par with that of advanced economies.

Trade Imbalances and Regional Shifts

US-China Trade: The US trade deficit with China has widened to approximately $355 billion, and with the EU $241 billion in 2024, while China enjoys a record trade surplus against the US and has eventually become the second largest holder of the US dollar after Japan.

Broader Imbalances for the US: Disrupted trade relations and counter-tariffs are expanding global imbalances, fueling supply chain reconfiguration and redirection of trade routes. These would hurt everyone involved in this war. However, the US would be the one to lose most. It wouldn't only increase cost of living in the US but also hurt its global economic dominance.

Policy Option: Protection or Integration

Sectors like agriculture, textile, manufacturing and raw materials attract tariffs in varying degrees. As countries seek economic balance and strategic bargaining power, policies alternate between protectionist tariffs and greater integration are being evaluated.

Protectionist Pressures: Every country faces some domestic demands for a protectionist approach to trade. So, tariffs are popularly justified as a way to safeguard local jobs, reduce deficits, or pressurize competitors. But it couldn't be that straight. Developing countries have different needs while developed and aged countries have completely needs. Most of the developing countries have cheap and young labor while developing countries have relatively aged and costly labor. So protectionist actions may look lucrative in the short term, but risk inflation, lowered competitiveness, and fragmented supply chains in the medium to long term.

Integration Strategies: Many regions or groups of countries resist protectionism by launching new trade blocs (e.g., the Euro, the enlarged BRICS, the African Union) or by negotiating preferential agreements to prevent worldwide tariff increases. These mechanisms don’t provide direct access to everyone, but indirectly help in integrating the global trade, as every country is part of many trade blocs or has many bilateral trade agreements inside and outside the bloc.

Impact on Developing Countries 

Rising tariffs, mostly in agriculture and low-tech manufacturing, delay industrialisation, trap developing countries in raw material dependence, and limit upward mobility. Tariff escalation, where tariffs on manufactured goods are more than on raw inputs, is a key export diversification constraint for developing nations. So the developing countries which sell a large portion of their trade to developed nations would be hurt in the process. However, it would be a short term impact as there would be a realignment in the supply chains and the trade partners that would result in more diversified trade for developing nations. Economies like India, China and Vietnam would benefits from this realignment to huge extent.

The Future of Global Trade: Three Scenarios

1. High-Conflict Protectionism

In case the trade war continues to escalate, which is less likely, as neither the US nor other countries can sustain it for very long because of long-established interdependence. However, if there is high-conflict protectionism, then the world will witness:

• Global trade growth slows or even reverses, especially in manufactured goods.
• Prices rise for consumers and producers.
• Emerging economies may witness decreased market access.

2. Managed Fragmentation

This is the second most likely situation that which world is expected to witness for a few years before the world returns to a new normal. The supply chains are bound to be regionalised. Trade blocs may become more cohesive, and preferences for bloc members may creep into the practice, limiting trade flows with competitors. However, there would be some strategic sectors like rare minerals and semiconductors, etc, that may not attract much tariff or no tariff at altogether.

3. Re-Globalisation

This seems to be the best-case scenario. Post-pandemic, the world trade is already witnessing increased regionalisation and friendshoring. After an uproarious period, agreed deals would re-establish lower tariffs among trade partners; however, there will be a reshuffling of these trading partners. This will increase market access and secure the global supply chains. New digital and green trade deals can replace many old trade deals, and new trade institutions may become more important that prioritise resilience as well as growth over trade wars.

Conclusion

The future of global trade hinges on the tug of war between protectionism and integration. There must be a right balance between the two.  Trade wars and tariffs can influence not only short-term growth but also the international economic order. Policymakers' choices and the flexibility of businesses to adapt will shape whether globalisation reemerges with newfound vigour or succumbs to a new decade of managed, bifurcated trade. However, whatever turn the global trade takes, one thing is very clear that the US would be the first party to be at a loss and the second party would be the global organizations like WTO, World Bank and UNCTAD. The US will not only lose trust of its trading partners, but it is economic dominance and the status of the US dollar as a reserve currency would be challenged, and many countries may look for alternatives, such as other currencies or gold.

Rajeev K Upadhyay