The world of international trade is in for a major shake-up. The United States has significantly increased its tariffs, which are taxes on imported goods. This move has sent ripples through the global market, redirecting billions of dollars in exports that were originally headed for the U. S. Now, these goods are flooding into other countries, including Canada. This shift is expected to test the limits of even the most open trade nations.

The U. S. has long been the world's biggest consumer market. In 2024, around 15 percent of global imports went to the U. S. The country's low average tariffs of just 3. 3 percent made it an attractive market for many. However, those days are over. On April 2, the U. S. increased its average tariff rate to a staggering 22 percent. This is the highest among countries with major economies and has created a significant barrier for imports.

The impact of these tariffs is already being felt. China, for instance, exported US$438. 9 billion worth of goods to the U. S. in 2024. Many of these goods entered the U. S. duty-free because they fell below the US$800 "de minimis" threshold. However, the U. S. has now eliminated this exemption for low-value Chinese exports and imposed a reciprocal tariff on all Chinese imports of 34 percent. This rate has since increased further, making it prohibitively costly for China to export to the U. S.

The U. S. has also imposed a 25 percent tariff on all imported automobiles. This affects countries like South Korea, Japan, and Germany, which export cars to the U. S. market. While some of these exports may continue, others will likely be rerouted to alternative markets. This redirection of trade is creating a tidal wave of diverted goods headed for markets around the world.

This situation is not without precedent. In the 1930s, the U. S. enacted the Smoot-Hawley Tariff Act, which raised tariffs on thousands of imported goods. The result was a rapid contraction of global trade. Today, there is a similar risk. The greater concern is not the tariffs themselves or the retaliation they provoke, but the resulting trade diversion and wave of protectionism it can trigger.

The world may be in a more precarious position today than it was in the early 1930s. Western policymakers have long been concerned about "Chinese overcapacity. " China consumes too little at home and exports too much abroad, often using unfair practices to undercut local prices. This has led some governments to put new trade barriers in place. For example, Canada placed a 100 percent tariff on Chinese-made electric vehicles in 2024. A flood of diverted Chinese imports will only heighten these concerns.

At the same time, global trade rules meant to safeguard against protectionism have become brittle. The U. S. has blocked the appointment of judges to the World Trade Organization's highest court, which enforces trade rules. This has emboldened countries to openly flout WTO rules. For instance, Indonesia maintains a WTO-inconsistent export ban on nickel. Canada's electric vehicle tariff will likely be judged illegal under trade rules as well.

The global trading system is at a crossroads. There is still time for countries to reaffirm their commitment to international trade rules. These rules also allow countries to temporarily restrict trade when faced with a flood of imports. The Canadian government can proactively identify sectors at risk of disruption and call on the Canada Border Services Agency to investigate vulnerable sectors. If countries stick to these rules, the global trading system can weather the storm. However, there is also a risk of a slide toward protectionism. Faced with a deluge of goods coming from China, the temptation to erect illegal trade barriers will be high. The global economy stands at a crossroads: one path leads to a reassertion of international cooperation and global rules; the other to a cascade of protectionist measures and a weakening of the very system that has enabled decades of economic growth and stability.

The Global Trade Shake-Up: How U. S. Tariffs Are Changing the Game

Actions