Trump about to trigger greatest trade diversion ever seen
Faced with a deluge of Chinese goods seeking new non-US markets, the urge to erect illegal trade barriers will be high everywhere
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 US-Canada relations, but the wider ripple effects could prove just as damaging.
The tariffs have redirected billions of dollars in exports originally bound for the US, 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% of global imports went to the US 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%.
These days are now over. On April 2, the US increased its average tariff rate seven-fold to a staggering 22% — by far the highest among countries with a major economy.
Even though the US’s “reciprocal” tariffs have since been suspended for all countries except China and Trump has now exempted smartphones, computers and microchips, a 10% baseline rate and several sectoral duties remain in place.
Together, they form a tariff wall around the US, unlike anything seen in generations.
The great trade diversion
Much of the trade disruption stems from China. In 2024, China exported $438.9 billion worth of goods to the US. Millions of parcels, sent via e-commerce platforms like Shein, entered the US duty-free because they fell below the $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%.
This rate was increased further after China vowed to retaliate on April 4, and is now stacked on top of a 20% fentanyl-related tariff. The result is an effective tariff rate exceeding 100%, making it prohibitively costly for China to export to the US.
The last time US-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 $137 billion in goods to the US in 2024. While the 46% reciprocal tariff against Vietnam has since been suspended, the US is unlikely to tolerate such circumvention this time around.
The US has also imposed a 25% tariff on all imported automobiles. South Korea, Japan and Germany all export cars to the US 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.
Great Depression redux
The world has been here before. In the 1930s, the US 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 US Instead, global trade collapsed as US 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 they 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% 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 US 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 US 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.
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 US already has will be high.
The global economy stands at a crossroads: one path leads to a reassertion of international cooperation 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 is Hyman Soloway Chair in business and trade law, L’Université d’Ottawa/University of Ottawa
This article is republished from The Conversation under a Creative Commons license. Read the original article.