What’s Left of Globalization Without the US?

Many countries will make up for lost US trade by trading more with each other.

Author of the article:

Bloomberg News

Walter Frick

Published Nov 15, 2024  •  5 minute read

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(Bloomberg) — If Donald Trump follows through on his promised tariffs, the United States will likely trade much, much less with other countries. But what about the rest of the world? Would US tariffs end or even reverse the era of trade liberalization begun in the 1980s? Perhaps not.

Bloomberg Economics’ model of Trump’s proposed tariffs expects that other countries will offset most of their lost trade with the US simply by trading more with each other. That points to the possibility that globalization could keep on humming — just without the US at its center. To explore that scenario, Bloomberg Weekend spoke to Maeva Cousin, chief trade and climate economist at Bloomberg Economics, about her forecast.

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What will happen if Donald Trump follows through on his tariff promises?

The change in tariff rates on all US goods imports would be huge — it would take us back to levels last seen in the 1940s. Trump has proposed a 60% tariff on China and a 20% tariff on the rest of the world. Right now the average effective tariff rate on US imports is around 3%, up from 1.5% before the US trade war with China. The Smoot-Hawley tariff of the early 1930s took the average effective tariff close to 20%, but from a higher rate of around 14%. So that would be the same level, but a much bigger shock.

It’s very difficult to look at historical precedents, so we turn to a computable general equilibrium model, a large-scale model of the global economy. Our model suggests that US imports of goods would drop by about 50% from everywhere, and goods from China would drop by 90%. So nearly no trade left between the US and China.

What about US exports?

Even without retaliation you would see a very large decline in US exports — around 40%. When you start putting tariffs on imports, all the intermediate inputs that you’re using from foreign companies get more expensive. The result is that US exports become less competitive.

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If countries retaliate, then the drop in US exports is even larger — around 60%. Since exports fall alongside imports, the US trade deficit stays generally the same.

Are there US sectors you expect to come out ahead from tariffs?

If you’re in a sector that competes with a lot of imports, then tariffs could be good for you. In our model, mining benefits because the US imports a lot of minerals. The other sector that benefits is textiles.

You’re projecting that other countries start trading with each other a lot more. Will the world be drawn closer together, economically, by the US trading less?

Of all the goods traded globally, 20% either go to the US or come from the US. In our model with tariffs, we’re looking at that falling to 9%. Other countries will have to replace the market that they have lost in the US and replace some of the goods that they’re not importing from the US anymore. But most countries can replace a lot of that loss by exporting to and importing from the rest of the world. We project trade of goods between all other countries to increase by 5%. So total world trade goes down by just 7.5%.

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So the global economy’s reliance on trade might be a little bit lower than before, but the final result would be that the world is drawn closer together. The US is a major partner for many countries, but compared with the rest of the world taken together it’s still actually quite small. (There are two exceptions, and you could guess them: Mexico and Canada.)

China exports much more than it imports currently. Much of that is to the US. If that gets cut off, can China’s trade surplus continue?

I think China has a lot of potential to readjust in terms of domestic supply and productive capacity — in the first trade war, they readjusted. In our model, we expect they will find all the new markets that they need. But politically is that going to be too much of a strain on the rest of the world in terms of competition and concerns over reliance on China? That’s a challenge, and not something our model can fully capture.

What if we just get high tariffs on China and no or low tariffs on the rest of the world? In that scenario do we see trade basically rerouted through “connector” economies?

Yes, my assumption would be that you get connector economies rewiring supply chains. And then the question is whether there is an effort to plug the loopholes.

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Say we’re looking back in 10 years with the benefit of hindsight: we get the tariffs, we get the retaliation. And instead of more trade between other countries, we are seeing a retreat from trade. What would that scenario entail that the model isn’t expecting?

US trade policy could inspire copycats. More tariffs between other countries could mean less trade between the rest of the world.

What would tariffs mean for innovation and productivity around the world?

In our model, if you trade with partners that are more advanced and closer to the technological frontier, you’re more likely to make productivity gains. So when you cut out the US, which of course is quite ahead in technology, for some partners it can have a negative impact on future productivity growth. This could be a factor for Mexico, for example. From the US perspective, if you have to focus on producing textiles or mining, you end up reallocating more resources to those activities and fewer resources to more higher-productivity sectors.

What metrics should readers keep an eye on?

I’d definitely be watching what happens to trade flows to the US, and how quickly they adjust to the shock. I will be watching PPI in China to see whether lower demand is feeding through to prices and if you see some deflation. One way it could play out is that China sees factory price deflation if they don’t find enough market for exports. And I would be watching inflation in the US to see if tariffs are forcing a switch to more expensive products that is passed through to consumers.

Advocates of tariffs are betting that conventional economics is wrong about all of this. Are there any open economic questions that a tariff shock would help to answer?

For me it’s really how quickly the adjustment takes place. We know companies can be very, very agile when it comes to finding new ways of producing and organizing the product so that they don’t rely on imports. But how quickly do they adjust when the tariffs are much higher, and on a much wider range of goods?

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