Stronger together than apart? A Collective Action problem for dealing with a trade war with the USA

President Trump’s tariffs are an assault on the global trade system. As countries prepare to respond, we risk further fragmentation and undermine the possibility of collective action as individual countries weigh the costs and benefits for their country and economy. The rules-based trading system has underpinned extraordinary economic growth over the last 75 years, and despite clear gaps in delivering equal benefits for certain communities or parts of the environment, its contribution to human welfare has been massive. Despite this growth and aggregate benefit, Trump’s tariffs have spurred countries to question whether they are stronger as part of a collective or alone in their response(s) to this economic shock.

Justifications

It is now clear that the amounts set in the tariffs of the 2 April 2025 are not tied to the tariffs or other trade policies of partner countries, just to their trade deficit with the US. But the tariffs go beyond even bad economics. Trump is stretching the trade toolkit to punitively advance all kinds of policy objectives, from migration and drugs smuggling to conflicting domestic objectives such as raising revenue and boosting manufacturing employment. These policies do not seem to fit into a coherent plan based on economic logic.

A generous and optimistic interpretation of Trump’s tariff shock is to suggest that these changes are designed to advance the trading system. However, for several decades, Trump has sung the virtues of tariffs, he sees the world in zero-sum terms and does not warm to the win-win narrative of trade that economists espouse. This may have the consequence of leading the rest of the world to reform the World Trade Organization (WTO) without the US and subsequently develop a stronger liberalisation of international trade minus one, but this does not seem plausible.

Costs of the tariffs

Trumps tariffs impose direct economic costs on the US economy and on all the countries which sell products / goods into the US. They will also impose indirect costs on all, as countries whose trade has been disrupted suffer economic setbacks and purchase less from other partners. Exactly how the burden falls will vary from country to country and market to market; it will be disruptive immediately, but its long-run consequences will only emerge slowly.

At first glance, the enormity of the rupture the tariffs signify to the rules based system underpinning international trade may not be obvious to the public. The logic behind the imposition of the tariffs falls outside of the rules-based trading system and the WTO’s Most Favoured Nation commitments. These tariffs challenge the development and maintenance of this system, which has, following World War II, provided an institution to address global issues like the environment as well as resolve trade disputes. Global governance is ultimately based on trust, mutual agreements, dispute resolution and collective action by many nations. Despite the US moniker, there is no world police.

The US accounts for a bit over 11% of world trade. Disrupting that is a big blow, but it leaves around 89% in principle independent of the shock. The shock that US tariffs induce will likely be felt everywhere, but it need not affect the terms on which the other countries of the world (165 of which are members of the WTO) trade with each other.

Responses

The spillover of this shock from trade to other governance areas, both in Trump’s actions and the responses, risks spreading like a disease to other global governance architecture elements – from the environment to the nascent alignment on AI. The benefits of the global system of trade cannot be separated from the wider rules-based system of multilateral institutions created after World War II.

Some countries, including the UK, are attempting to negotiate individual trade deals with the US that may eventually mitigate the shock, but the price in terms of concessions to the US may be high. The response of other countries to these tariffs potentially spills beyond tariffs in goods, further destabilising global governance. In some cases, retaliation may target specific services, particularly digital platforms, as this is a glaring blind spot in the already bogus calculations of the ‘reciprocal tariffs'. The EU is apparently musing a response along these lines.

In other cases, like the UK, the temptation will be to accommodate policy changes in separate areas, despite a clear social demand for government action. Media outlets report that the UK is considering backtracking on the regulation of artificial intelligence (AI) and US platforms or aligning with the free speech of JD Vance in the application of the Online Safety Act. There is even discussion of offering a unique exemption to US companies from the Digital Services Tax, which somehow would make a reality of the alleged discrimination of US tech, but the other way around. This will undermine any effort at a global fair tax system, and not just for multinational digital platforms.

Incentives for collective action and defection from collective action vary. Various factors - including trade intensity rates, tariff rates, international collaboration, and long-term intentions and commitments to the rules-based trading system - all play a role. Where individual retaliations against the US can lead to a bilateral trade war and create a vulnerability for those trade partners, a coordinated retaliation response by the US’s major partners may provide sufficient pressure to a) influence US future trade policies, and/or b) support trade diversification. If for example, large economic players such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership countries aligned with the EU, these economies may be able to add pressure to the US government to treat the alliance collectively. However, the trade dependency (e.g., Canada’s exports and imports more than 75% with the US) and tariff rates (e.g., UK at 10% but Brunei, Japan, and Malaysia at 24%, and Vietnam at 46% tariffs, and the EU at 20%) vary across these jurisdictions. As a result, each country may have an incentive to defect from a collaborative/collective action retaliation against the US and try to negotiate a bilateral deal. According to reports, over 50 countries have already reached out to Washington.

Rally around institutions

We have a rules-based trading system that has benefitted nearly every country, and we should not let the defection of one of the originators of the system and its largest (or second largest) member destroy it for good. Trying to preserve the essence of this co-operative system should be a high priority. While there are many aspects that need to be reformed to meet the demands of the current global economy, the immediate priority is to stabilise it and to make a commitment to negotiate necessary reforms in good faith.

Right now, the job of preserving the system falls to every country. As members of the trading community consider what they might do in the face Trump’s reciprocal tariffs, the first step may be recognising that collective action is better than uncoordinated individual action, while acknowledging that achieving this at this point is highly challenging.