A ship without a captain: How countries make trade alliances without the U.S.

U.S. President Donald Trump is seriously engaged in restructuring the international trade system, and it seems that other countries, which he hits with import duties, have nowhere to go, because the U.S. market is the largest in the world. But to reduce their dependence on it and support their economies, they have begun to negotiate with each other, including on projects that have been under discussion for decades. As a result, trade may become freer - outside the US;

International trade can develop in different ways - from a war of all against all with the imposition of high duties and trade barriers, as in the 1930s, to the redistribution of trade flows and increased cooperation, but along different lines;

The geoeconomic fragmentation (division into geographic and ideological blocs) now underway is not a new phenomenon, points out Gita Gopinath, the IMF's first deputy director, with colleagues;

A historical precedent is the Cold War period: while aggregate trade (relative to world GDP) grew strongly, trade between the capitalist and socialist blocs declined relative to trade within them. 

Recently, even before Trump's second term in office, factions around the US and China began to form. But the so-called non-aligned countries did not suffer from the growing fragmentation, Gopinath points out, as they remained actively engaged with both blocs.

But the new Trump administration, waging war against everyone, is destroying that construct: pushing away both allies like Mexico, Canada, and Europe, and developing countries like Vietnam, which, under pressure from Washington, agreed to 40 percent duties on re-exports (which effectively undermine shipments of Chinese goods through Vietnam).

Richard Baldwin, professor of economics at the International Institute for Management Development in Lausanne (IMD Business School), framed the situation as follows in a recent study, "The Great Trade Hack: How Trump's Trade War Failed and the World Moved On." "What should the rest of the crew do when the captain jumped ship (after setting fire to the navigation charts)?". 

The worst thing team members can do, he argues, is to start fighting each other: "If each country responds with its own version of economic nationalism, tit for tat and trade aggression, we risk a downward slide back to the 1930s, when a wave of retaliatory duties helped turn the financial crisis into a global depression."

Adaptation is possible, Baldwin says, because 85 percent of global trade is conducted outside the U.S., and countries should deepen regional and interregional trade relations to maintain it. He cites Japan's actions to save and expand the Trans-Pacific Partnership as an example. Trump pulled the U.S. out of it immediately after first taking office in January 2017, after which many considered the agreement reached a year earlier dead. 

But Japan, with methodical behind-the-scenes work, salvaged the trade and economic integration deal, and in 2018, 11 countries signed the Trans-Pacific Partnership agreement, Baldwin notes. In 2023, a country from a very different region, the United Kingdom, joined. The partnership now has 12 members. Six more countries, including China, have formally applied to join. By working together, the countries were able to get things done after "U.S. leadership evaporated," Baldwin notes.

The EU has already begun to step up engagement with other countries caught in Trump's "tariff fire." While contacts, especially with other G7 members, are regular, "there is now a new sense of urgency" to deepen them, European Trade Commissioner Maroš Šefčovič announced July 14.

In late June, the EU signed a security and defense cooperation treaty with Canada. Canada wants to participate in Europe's rearmament program, among other things, to reduce its dependence on the United States. "We're going to build trade relationships with like-minded partners, trusted partners," said Canadian Prime Minister Mark Carney. - The future of trade includes such defense cooperation." 

Some NATO countries are pursuing "an allied industrial policy that will make us stronger," he said. And as early as mid-July, Canadian and EU representatives started drawing up a plan to cooperate on a "new industrial policy." According to Carney, "the future of trade is in this, not in a narrow discussion of duties."

The two sides also began talks on a digital trade agreement to promote the development of artificial intelligence systems, regulate online platforms, ensure cybersecurity, and unify digital standards.

The need to urgently seek a substitute for the U.S. market is due to the economic losses that U.S. partners will suffer as a result of Trump's duties. In the words of German Chancellor Friedrich Merz, the 30 percent duties would "strike at the very base of the German export industry and overshadow everything," forcing the government to partially postpone its reform program. Combined with industry levies, both those already imposed and those expected, the effective duty rate for the EU would then rise by 26 percentage points, quoted by Bloomberg in a report by Goldma analysts They estimate that if these duties are imposed and maintained, it would reduce eurozone GDP by a total of 1.2 percent by the end of 2026.

The EU intends to strengthen relations and coordinate with other countries affected by Trump's duties, including Japan, Bloomberg notes. Last weekend, the bloc reached a preliminary agreement with Indonesia on the Comprehensive Economic Partnership Agreement, which the country's President Prabowo Subianto called a "breakthrough". 

Cooperation in 21 areas, including trade in goods and services, investment, customs procedures, digital services and trade, has been discussed since 2016. The talks have stalled over disagreements on a range of trade issues, but Jakarta and Brussels have an "urgent strategic need" to conclude them amid Trump's trade war, the Asia-focused publication The Diplomat pointed out. The U.S. president sent Indonesia a letter to impose 32 percent duties from August 1 and threatened the EU with 30 percent duties - despite the fact that both had been in trade talks with Washington. According to Indonesian Economy Minister Airlangga Hartarto, the formal signing of the agreement with the EU is expected in the third quarter.

And on July 18, the EU approved the start of negotiations on bilateral strategic partnership agreements with six Gulf countries. They should begin as soon as possible and will address security and energy issues, diversifying relations and reducing dependence on the United States, people familiar with the decision told Bloomberg.

Brazilian President Luiz Inácio Lula da Silva announced his country's desire to find new trading partners after Trump threatened it with a 50 percent duty for reasons not even related to trade. Brazil became the first country with a trade deficit with the US for which Trump intends to raise the rate from the standard 10 percent. He also threatened additional 10 percent duties on BRICS and other nations that join the "anti-American" policies of the 10-nation bloc.

The EU has been negotiating with the South American free trade zone MERCOSUR for two decades. Now Brussels aims to finalize them by the end of the year, writes the Financial Times. If successful, a common market of 700 million consumers will emerge, bringing the EU together with Brazil, Argentina, Uruguay and Paraguay.

China is not standing still, either, as it seeks to strengthen its international economic influence and develop trade with 150 countries through its Belt and Road Initiative (BRI). At the beginning of the decade, at least China's public activity in BRI went downhill after a series of scandals where Chinese projects implemented on opaque terms left a number of countries with unsustainable debt burdens;

For example, Pakistan had to seek financial assistance from the IMF, Sri Lanka had to hand over control of a strategically important port to China, and the Maldives had to ask China for debt reduction and restructuring. But trade problems with the United States, which worsened in Trump's first presidency and persisted under Joe Biden, have convinced Beijing that it needs to continue to expand activity in overseas markets. 

It now has advanced technologies, particularly in solar energy and electric cars, with which it is conquering the global market. Although excessive Chinese exports are forcing the same EU to restrict them, for example, in the sectors electric cars or steel. 

The value of new investment and construction contracts by Chinese companies in BRI countries has hit a record high this year, according to a study by Australia's Griffith University and the Green Finance and Development Center in Beijing. There were 176 deals worth $124 billion in the first half of the year, compared with $122 billion for the whole of 2024, the FT cites its findings.

Kazakhstan received the largest amount - $23 bln.

Total cumulative contracts and investments under BRI reached $1.3 trillion.

The slowdown in their own economy and the need to diversify supply chains and markets due to the trade war triggered by Trump's duties has led Chinese companies to become more active in foreign countries, which in turn see "an opportunity to deepen ties with China amid changing global geo-economic dynamics," said study co-author Christophe Nedopil Wang.

The regional leader in attracting Chinese money was Africa ($39 billion). Trump's "Africa Second" policy (he has drastically cut its humanitarian aid, accused South Africa of oppressing white citizens, and imposed the highest duties of any country - 50% - on Lesotho) opens up great opportunities for China and for increasing intra-regional trade, writes David Filling, the FT's Africa editor and columnist.

Especially since the U.S. accounts for only about 5 percent of all African trade. And the continent's countries, says Filling, should act more effectively within the framework of the African Continental Free Trade Area. The African Continental Free Trade Area (ACFTA) was launched in 2021, but is being phased in slowly due to tensions between countries that differ greatly in their level of development;

The ideal approach would be for governments of different countries to form "coalitions of the willing" that, with or without the United States, would work to uphold the norms of the global trading system and liberalize trade, accounts Kimberly Klosing, a professor at the UCLA School of Law. If such work continues, it could be "joined by future U.S. governments if future American voters reject the isolationism and protectionism that underpin Trump's agenda." 

"The world has much to gain from continued economic cooperation. A free and open trading system offers great opportunities for prosperity and economic growth," Klosing states.

This article was AI-translated and verified by a human editor