S9 Ep22: World War Trade

Episode Summary

Executive Summary: Richard Baldwin argues that global trade has entered a new era of weaponization—"World War Trade"—driven mainly by U.S. tariffs and Chinese export controls. He says the old U.S.-led trading order is breaking down, but a new, more regional, rules-based system is emerging through blocs like the EU, CPTPP, and RCEP.

Main Topics: Trade as a weapon: the rise of 'World War Trade' (Priority: 5/5): Baldwin frames the current trade conflict as a peacetime weaponization of commerce, centered on U.S. tariffs and Chinese export controls, with broader spillovers into investment screening and IP controls. How the conflict began and why it was not a surprise (Priority: 5/5): He traces the escalation to Trump’s campaign promises, early tariff actions against major partners, and China’s shift from moderate retaliation to broad export controls. Markets, 'taco,' and why financial panic eased (Priority: 4/5): The discussion explains why markets initially reacted sharply but later calmed after Trump suspended tariffs, leading investors to assume he would back down from the most destabilizing moves. A cold war rather than a hot war (Priority: 4/5): Baldwin argues the U.S.-China trade confrontation is better understood as a long-term cold war: both sides keep their main weapons in place, but direct escalation has paused. Other countries' response: restraint and 'building bunkers' (Priority: 4/5): Most countries avoided retaliation, continued to invoke WTO rules, and instead strengthened domestic screening and anti-coercion tools to prepare for future pressure. The decline of U.S. hegemony and a more conflictual world (Priority: 3/5): He links trade fragmentation to a broader retreat of U.S. leadership, which he says has made global coordination weaker and regional conflicts harder to manage. The emerging post-war trading order (Priority: 5/5): Baldwin sees a new system forming around regional, rules-based agreements—especially the EU, CPTPP, and potentially RCEP—creating a de facto WTO 2.0 without U.S. leadership.

Key Arguments: The April tariff and export-control moves marked an unprecedented peacetime weaponization of trade, even if no formal war was declared. Trump’s trade agenda was visible in advance through campaign promises and early tariff actions, so the shock was in scale, not direction. Tariffs are the main U.S. weapon; China’s main weapon is export controls, though both sides also use broader coercive tools. Financial markets initially feared systemic collapse, but Trump’s suspension of tariffs created a belief that he would not allow total market breakdown. The conflict is unlikely to end soon because neither U.S. nor Chinese politics can easily return to pre-conflict trade normality. Most countries have chosen negotiation and legalistic restraint over retaliation, which reduced the chance of bloc formation. China’s export controls may have unintentionally helped preserve the multilateral system by preventing a clean anti-China coalition from forming. The world is not reverting to the old order; instead, regional trade agreements are becoming the main source of predictability and liberalization. The U.S. appears to be withdrawing from the system, while the rest of the world continues trading and building new rules-based structures.

Data Points: Trump tariff announcement date: April 2 - Baldwin says the U.S. tariffs announced on April 2 would be equivalent to World War III if they were missiles. China export-control response date: The next day after April 2 - China responded with export controls on the entire world immediately after the U.S. tariff move. U.S. tariff rate on China promised in campaign: 60% - Trump repeatedly said during the campaign he would impose 60% tariffs on China. U.S. tariff rate on everyone promised in campaign: 10% - Trump said he would put 10% tariffs on everyone. Tariffs on Canada, Mexico, and China: 25% - Baldwin notes Trump imposed 25% tariffs on the three largest trading partners in February. Steel and autos tariffs: March - Trump had already imposed tariffs on steel and autos before April began. Tariff suspension date: April 9 at midnight - Trump put tariffs into effect and then suspended them about noon on April 9. Share of U.S. imports exempted: About 50% - Baldwin says half of U.S. imports were exempted, making actual applied tariffs much lower than headlines suggested. World trade growth: Pretty well in 2025 - He says global trade still grew in 2025 despite the conflict. U.S. trade deficit: Largest ever in 2025 - Baldwin cites the U.S. recording its largest trade deficit ever in 2025.

Pivotal Quotes: "If the tariffs that Donald Trump put on the world on April 2nd were missiles instead of tariffs, there would be no question whatsoever that this was World War III." — Richard Baldwin: Defines the scale of trade weaponization and justifies the 'World War Trade' framing. "Trade flipped from being safe to being dangerous." — Richard Baldwin: Summarizes the core thesis that commerce is no longer a neutral, low-risk domain. "We’re in a cold war. We have two countries with these two very large weapons." — Richard Baldwin: Describes the U.S.-China trade confrontation as a long-term standoff rather than a short, decisive conflict.

Implications: Expect a more fragmented but still functioning global trading system: less U.S.-centered, more regional, and more rules-based. Firms and policymakers should plan for persistent U.S.-China decoupling, tighter screening, and deeper reliance on trade blocs.