Repeated shocks risk global trade

The Sun

10-06-2025

DISCUSSION around the consequences of President Donald Trump's economic policies – most notably the increased tariffs on all countries, especially China – has centred on economic costs.
These costs affect both businesses and consumers, manifesting as higher prices for traded goods, a shift in production to less efficient locations and reduced consumer choices when goods are no longer produced or traded.
The focus on economic costs neglects a more impactful and troubling development: a shift in global trade governance and the exchange of goods under it. The US has gone from being the establisher and leader of international trade institutions to being the single greatest threat to their continuation.
Multinational enterprises that have prospered under this system face unprecedented uncertainty and increasingly stark choices between upholding the system and being undercut by competitors forced to circumvent it.
Businesses engaging in international trade and investment have long relied upon rules, principles and norms established under the General Agreement of Tariffs and Trade (GATT) in 1948 and deepened under the stewardship of the World Trade Organisation (WTO) since 1995.
The international system under GATT and WTO supports trade through the elimination of trade barriers including tariffs, quotas and subsidies, by establishing principles of equal treatment and by providing mechanisms to manage disputes between nations and companies.
Continuing business faith in multilateral trade rules and liberalisation is increasingly at odds with the positions of nation-states.
The global financial crisis in 2007 to 2008, China's rapid rise to dominant global manufacturer since joining WTO in 2001 and legitimate concerns with the distribution of trade benefits within countries have contributed to popular backlash against freer trade.
The rise of powerful global corporations that pursue profits rather than sovereign interests has also played on the fears of nation-states that, through liberalisation, have ceded much regulatory autonomy.
Against this backdrop is a world besieged by increasingly frequent major shocks – of human and natural origin. Businesses and nation-states are navigating trade wars, disease outbreaks, military conflicts and intensifying weather events – individually and in tandem.
Discourse typically bundles these shocks together to paint an overall picture of instability, lower confidence and temporary disruption to economic activity. But to appreciate the sustained consequences for trade, the stepwise influence of each major shock deserves further examination.
The first Trump administration's trade war from 2018 provided the first substantial and symbolic shift from trade liberalisation to restriction. It delivered an initial blow to the 'made in China, sold in America' model, prompting conversations in global boardrooms around the need to reduce dependence on production in China.
However, investors were largely unwilling to forgo China's cost competitiveness with the re-export of goods via third countries, particularly in Southeast Asia, being the dominant response. Trade continued within the bounds of international governance.
The Covid-19 pandemic from early 2020 created more substantive fractures between businesses and governments on trade governance.
International institutions proved incapable of mobilising an effective and coordinated health and economic response, with business disruption amplified under diverging sovereign measures.
China's draconian response delivered a goal for its reputation as a reliable production location. While economists and businesses marvelled at the adaptability of global supply chains, governments saw vulnerabilities requiring intervention on national security grounds.
Russia's invasion of Ukraine in early 2022 poured salt into the open wound, sharply highlighting the divergence between corporate interests and those of nation-states.
US-led sanctions on trade with Russia sought to divide markets along geopolitical lines with little regard for business impacts.
The ability of businesses from Russia, China, India and elsewhere to circumvent inadequately enforced sanctions exposed the limits of international and national governance to uphold trade restrictions.
Companies from America, Europe and elsewhere had to choose between supporting sanctions and sustaining profits, with many becoming circumventers. That markets did a better job of navigating sanctions and war than governments did of implementing sanctions reinforced the pandemic fracture between businesses and governments, significantly eroding trust in international trade governance.
It is in this context that Trump 2.0 must be seen as an existential threat to prospects for restoring faith in the system.
The US is now the primary source of economic policy uncertainty and lead antagonist undermining international institutions, imposing and threatening smaller countries with tariffs and hollowing out WTO.
Businesses conditioned by pandemic-induced disruptions and ineffectual sanctions face another choice between wearing tariff costs and being undercut by less scrupulous competitors.
Maintaining support for formal, rules-based and ethical international trade means contending with an increasingly formidable global network of informal actors and activities that outmatch the enforcement efforts of trade regulators.
After all, border processes that have been streamlined and deregulated over decades to encourage seamless and trusted trade cannot be instantly and effectively converted to a punitive enforcement stance.
And neither Trump nor the countries he threatens appear willing to plough resources into tighter trade regulation or have a vision for what enforcement looks like.
Arresting the decline of trade institutions may seem insurmountable in the current geopolitical environment but the alternative is trending towards a future in which governments everywhere cede control of effective trade regulation.
In such a world, the ability of international institutions and nation-states to uphold product standardisation and safety, supply chain resilience and ethical practices is compromised.
Government capacity to raise revenue and manage the macroeconomy is further weakened by growing informality while businesses and consumers pay for the additional risk embodied in less-regulated trade.
The world sans the US must act quickly to reinforce the international system, strengthening international institutions, including WTO.
Space for greater leadership from large emerging economies must be created to forge a collective governance approach for countries across the development spectrum.
Tackling systemic destruction is far greater and more economically consequential than addressing the immediate impact of Trump tariffs. A world in which trade operates outside of good governance frameworks would leave everyone poorer.
Dr Stewart Nixon is the deputy director of research at the Institute for Democracy and Economic Affairs (Ideas). The views expressed in this article are solely those of the writer
and do not necessarily represent the views or positions of Ideas Malaysia.