At the time of writing, uncertainty remains about the extent of Trump’s new tariff regime. Tariffs are hugely important for investors and policymakers, having a profound impact on currency markets, equities and global trade.

Here’s a brief summary of how some key policymakers are responding to the prospect of a global trade war.

The end of the world trade as we know it?

Speaking at the World Economic Forum Annual Meeting at Davos, European Commission president Ursula von der Leyen worried that global trade is starting to fracture.

She told delegates that it’s in “no one’s interest to break the bonds in the global economy”.

European Central Bank President Christine Lagarde has reiterated that Europe needs to be prepared for US tariffs against the EU, calling for further removal of obstacles to trade between European states.

There goes the neighbourhood

Trump has warned that he might impose tariffs on Canada and Mexico as soon as February.

Mexico President Claudia Sheinbaum has said that she would defend Mexico’s “sovereignty and independence.” She stressed the importance of ‘keeping a cool head’ and said it was important to focus on actual law, not mere rhetoric.

Outgoing Canadian Prime Minister Justin Trudeau said that the Canadian government was prepared to support Canadians affected by tariffs and that the country could retaliate, adding that he supports “the principle of dollar-for-dollar matching tariffs.” However, he stressed a desire to avoid a trade war.

Friendly but firm

Asia’s major economies are communicating a pragmatic approach.

A spokesperson for China’s foreign ministry said the country beliers there are “no winners in a trade war,” warning that China is “firmly committed to safeguarding national interests”.

Japan’s industry minister was diplomatic but firm, saying that in the event of tariffs, his country would “communicate closely with the US administration to deepen and develop Japan-US economic relations in a way that serves Japan’s national interests.”

India’s policymakers are reportedly looking into an effective response to potential tariffs that would preserve warm relations with the Trump Whitehouse.

Resilience in restraint

A common refrain among potential targets of US tariffs is that they would prefer to avoid tariff wars but that they would retaliate if necessary to protect their self-interest.

Harvard economist Dani Rodrik offers a different perspective. Tariffs, Rodrik argues, negatively affect the countries that impose them, thereby closing themselves off from open trade. Were Trump to impose blanket tariffs, countries would be tempted to impose tariffs of their own. However, Rodrik says, doing so would be ‘a tragic mistake’.  Rather, “there is no reason for them to replicate Trump’s error and raise the risk of an escalating trade war.”

Whether you agree with Rodrik’s analysis or not, he raises a clarifying point. Trump’s policy decisions are only part of the equation. The fate of the global economy also depends on how the rest of the world responds.

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