United States President Donald Trump's tariffs have shaken the global trading system. Canadians have rightly been preoccupied by the tariff's devastating impact on U.S.-Canada relations , but the wider ripple effects could prove just as damaging.
Author
- Wolfgang Alschner
Hyman Soloway Chair in Business and Trade Law, L’Université d’Ottawa/University of Ottawa
The tariffs have redirected billions of dollars in exports originally bound for the U.S., which are now poised to flood global markets - including Canada's. This will trigger a historic trade diversion that will put even the most free trade-minded nations to the test.
Around 15 per cent of global imports went to the U.S. in 2024. The country has long been the world's biggest consumer market, in part, due to its low average tariffs of just 3.3 per cent .
These days are now over. On April 2, the U.S. increased its average tariff rate seven-fold to a staggering 22 per cent - by far the highest among countries with a major economy.
Even though the U.S.'s " reciprocal" tariffs have since been suspended for all countries except China and Trump has now exempted smartphones, computers and microchips , a 10 per cent baseline rate and several sectoral duties remain in place.
Together, they form a tariff wall around the U.S. unlike anything seen in generations.
The Great Trade Diversion
Much of the trade disruption stems from China. In 2024, China exported US$438.9 billion worth of goods to the U.S. Millions of parcels, sent via e-commerce platforms like Shein, entered the U.S. duty-free because they fell below the US$800 "de minimis" threshold .
On April 2, Trump eliminated this exemption for low-value Chinese exports and imposed a reciprocal tariff on all Chinese imports of 34 per cent.
This rate was increased further after China vowed to retaliate on April 4, and is now stacked on top of a 20 per cent fentanyl-related tariff. The result is an effective tariff rate exceeding 100 per cent, making it prohibitively costly for China to export to the U.S.
Last time U.S.-China trade tensions escalated, China rerouted many of its exports through Southeast Asia . This time, however, Southeast Asian countries were hit hard, too.
Vietnam, a major destination of Chinese export-oriented foreign investment, exported US$137 billion in goods to the U.S. in 2024. While the 46 per cent reciprocal tariff against Vietnam has since been suspended , the U.S. is unlikely to tolerate such circumvention this time around.
The U.S. has also imposed a 25 per cent tariff on all imported automobiles . South Korea, Japan and Germany all export cars to the U.S. market . While some of these exports may continue as tariff costs are absorbed or passed on to customers, others will divert their vehicles to alternative markets.
All told, billions of dollars in trade are being rerouted, with a tidal wave of diverted goods now headed for markets around the world.
A repeat of the Great Depression
The world has been here before. In the 1930s, the U.S. enacted the Smoot-Hawley Tariff Act , which raised tariffs on thousands of imported goods in an effort to shield American industries during the Great Depression. The result was a rapid contraction of global trade.
What ultimately tipped the world over the edge wasn't direct retaliation against the U.S. Instead, global trade collapsed as U.S. trading partners turned on each other. Faced with a flood of diverted goods, they rushed to protect their own manufacturing by enacting trade restrictions of their own.
Similarly, today, we face a similar risk. The greater concern is not Trump's tariffs themselves or even the retaliation they provoke, but rather the resulting trade diversion and wave of protectionism it can trigger.
Old fears, new pressures
In some respects, the world may be in a more precarious position today than it was in the early 1930s.
For close to a decade, western policymakers, including G7 members, have sounded alarm bells over " Chinese overcapacity ." China consumes too little at home and exports too much abroad , often using unfair non-market practices such as covert subsidization to undercut local prices.
Fears of deindustrialization have already led some governments to put new trade barriers in place. Canada, for example, placed a 100 per cent tariff on Chinese-made electric vehicles to protect its own nascent industry in 2024. A flood of diverted Chinese imports will only heighten these pre-existing concerns.
At the same time, global trade rules meant to safeguard against protectionism have become brittle. The U.S. has blocked the appointment of judges to the World Trade Organization's highest court , which is tasked with enforcing trade rules.
The resulting impunity has emboldened countries beyond the U.S. to openly flout WTO rules. Indonesia, for example, continues to maintain a WTO-inconsistent export ban on nickel . Canada's electric vehicle tariff will likely be judged illegal under trade rules as well.
Global trade system at a crossroads
The Great Trade Diversion is set to put an already strained system to the test. There is still time for countries to reaffirm their commitment to international trade rules. Those same rules also allow countries to temporarily restrict trade when faced with a flood of imports.
The Canadian government can proactively identify sectors at risk of disruption and call on the Canada Border Services Agency to self-initiate investigations into vulnerable sectors to swiftly clear the procedural hurdles for imposing temporary import restrictions.
If countries stick to these rules, the global trading system can weather the storm. Just as possible, though, is a slide toward protectionism. Faced with a deluge of goods coming from China, the temptation to erect illegal trade barriers like the U.S. already has will be high.
The global economy stands at a crossroads: one path leads to a reassertion of international co-operation and global rules; the other to a cascade of protectionist measures and a weakening of the very system that has enabled decades of economic growth and stability.
Wolfgang Alschner receives funding from the SSHRC.
