Yet, if his “national security” justification fails, he is likely to fall back on another pretext, perhaps invoking Article 301 of the US Trade Act that allows retaliation against ‘unfair trade practices.’ With largely compliant legislators backing him, the likelihood of any tariff rollback appears slim.
More troubling is his decision to link trade deals with non-trade issues—wars, political loyalties and even personal considerations. Such moves are only possible in a post–Cold War world, but they have sparked two major anxieties. The first is that his ‘on-again, off-again’ manoeuvres in West Asia and Ukraine could ignite a wider global conflict. The second is the risk of a slide into a 1930s-style global recession.
The geopolitical dimension demands a broader discussion. Here, however, the focus is on the economic question: is a tariff war inevitable and could it shrink global trade? While Trump’s unilateral political style is deeply unsettling, evidence suggests that his trade gambit is unlikely to trigger a tariff-induced global depression.
To begin with, 2025 is very different from the 1930s. Back then, the world operated on the gold standard, unlike today’s flexible exchange rate system. In the 30s, unilateral tariff hikes by the US raised domestic prices, reducing its import demand. Exporting countries responded with retaliatory tariffs to protect their home markets, creating a spiral of ‘competitive tariff retaliation.’ The result was catastrophic: world trade shrank by nearly 60%.
By contrast, today’s flexible exchange rates cushion such shocks. Currency depreciation can absorb much of the impact, ensuring that prices in export markets remain relatively stable. Although some immediate price adjustments occur, gradual depreciation offsets tariffs over time—a process known as ‘exchange rate pass-through.’
Evidence of this is already visible. According to the DXY index maintained by the US Federal Reserve, the dollar has weakened by about 4.2% against major currencies over the past six months. Commodity trade, often the most sensitive to tariffs, has been stagnant in real terms since 2008, even as services trade has grown.
In many cases, companies absorb tariff-related costs rather than pass them on to consumers, especially if demand is price-sensitive. Market access, after all, outweighs short-term profitability. United States Trade Representative research confirms this: a 1% tariff increase has led to only a 0.25% rise in domestic prices in recent years.
Trading firms offset costs through exchange rate adjustments and slimmer profit margins. Since runaway price increases triggered the destructive tariff wars of the 1930s, the present environment makes a repeat far less likely, especially given the allure of the large US market.
Another crucial distinction between today and the 1930s lies in the structure of global trade itself. Foreign direct investment (FDI) now plays a central role, with about 60% of trade taking place between subsidiaries of multinational corporations. Much of this trade involves intermediate inputs assembled into final products within global value chains (GVCs). Because GVC trade is driven by transnational corporations, production can be shifted across borders to mitigate the impact of tariffs.
In effect, global corporations can treat tariff-induced costs as ‘trade costs’ and adjust their supply chains accordingly. And trade and FDI are but two sides of the same coin.
Global production networks are already adapting to tariffs. Large Indian textile exporters, for instance, are moving operations to Vietnam, Myanmar and Bangladesh to retain access to the US market. Such restructuring allows exports to continue, as what is taxed in one jurisdiction can be reclassified as deductible costs in another. The result is that overall profits stay protected even as supply chains shift. This adaptability is precisely why Trump’s vision of reviving US manufacturing through tariffs is unlikely to materialize.
In short, while Trump’s political unilateralism may destabilize geopolitics, his tariff strategy is unlikely to push the world into a repeat of the 1930s. Flexible exchange rates, multinational corporate networks and global value chains serve as shock absorbers. Tariffs do create uncertainty and inefficiency, but they will not lead to the kind of trade collapse seen nearly a century ago.
Also note that as a consequence of the 1930s’ Great Depression, a multilateral system of institutional cooperation exists, even though Trump may be pulling the US out of it. The WTO’s multilateralism has suffered a setback, but mechanisms for cooperation exist in other fora.
All taken into account, today’s networks of commercial arrangements, regional trade pacts included, will either frustrate Trump’s aim of bringing manufacturing back to the US or cost his country dearly in economic terms.
The impact Trump will have on global trade is limited. But his impact on international political relations could leave an indelible mark and have geopolitical implications. But then, 2028 is not so far away.
The author is visiting professor, Shiv Nadar University.
#Americas #trade #policy #misguided #drag #1930s
