How countries respond to Trump's tariffs is what matters next

The tariffs are not a bluff; they are already in effect, and this is merely the opening gambit from the US President's office. The global trading system is facing an unprecedented situation, with a broader trade conflict brewing as President Trump prepares to impose similar tariffs, first on Europe, and then more broadly, albeit at a lower level.

However, equally important to the actions taken by the US is how the rest of the world will respond. This, in turn, requires judging what the President's true aim is. Trump has frequently changed his rationale for tariffs, sometimes to force diplomatic change, sometimes to address trade imbalances, and sometimes to raise considerable revenue. These policy goals cannot all be achieved simultaneously.

For example, learning from the experience of Trump’s “China deal” in his first term, Western diplomats have been scrambling to find lists of more US goods they can buy, to give the White House some wins. Europe may say it is increasing its purchases of US liquefied natural gas, weapons, or specialized magnets for wind turbines. Even if these trends were already in place, it is enough for the US President to be able to claim “victory”.

But is changing the trade deficit numbers really the goal here? Officially, Trump’s stated reason for this move is punishment for the trade in the synthetic opioid fentanyl, but this is widely seen as a legal pretext for “emergency” action that would usually require a Congressional decision. Canada has indicated it will take a hard line with Trump, with Mark Carney, a contender to be the country’s next Prime Minister, being the most explicit. “We will retaliate in kind… dollar for dollar,” he told the BBC, scoffing at the fentanyl rationale and stating that Canada would “stand up to bullying.”

Whether Carney succeeds Justin Trudeau and eventually chairs the G7 (the world’s seven so-called “advanced” economies) is significant. As a former Governor of the Bank of England, Carney has witnessed Trump on the world stage at G20 and G7 meetings and has clearly concluded that the US leader only respects strength. He issued an implicit warning to any country trying to stay quiet and out of the President’s notice: “Good luck with that.”

In recent conversations I have had with European trade negotiators, they emphasized cooperation and partnership, as well as deals with the US. When pressed, they even avoided directly criticizing the extraordinary suggestion of using tariffs against a NATO ally, Denmark, over the fate of Greenland. The real question here is whether the rest of the world will coordinate retaliatory tariffs against high-profile political supporters of President Trump, such as Elon Musk, as has been common in smaller disputes.

Tesla, the electric car manufacturer led by Musk, warned last week about the impact of tit-for-tat tariffs. All of this is aimed at getting the competitive court around the President’s office, as well as stakeholders in Congress, to voice their concerns about the impact on US factory exports globally. This is not to mention the impact on domestic US prices. This could also be achieved by implementing planned carbon trading taxes in various jurisdictions, albeit in a more circuitous way.

How all of this plays out depends on how powerful the US is still perceived to be. Some countries may conclude that there are now other options in the world. With tariff threats being sprayed in multiple directions daily, the world is in uncharted territory.