The world braced for a Washington-made rupture last year. Trade held up, while China flooded many regions with its exports.
The world entered 2025 expecting a trade shock stamped “Made in Washington.” US President Donald Trump vowed to shrink chronic deficits and pledged a tariff-driven reset that would force companies—and trading partners—into new lanes. The shock never fully arrived.
Global commerce kept moving, prices for traded goods didn’t spiral, and exemptions and carve-outs softened the blow. The year still produced a real shift in the trade landscape—just not the one most people were watching for. China’s export engine accelerated, widening its surplus and pushing its cheaper goods deeper into markets in Southeast Asia and Europe, to the concern of those regions.
Meanwhile, the fastest-growing slice of trade wasn’t steel, cars, or containers; it was services. “Trade in services is growing at least twice as fast as trade in goods, and the US is a very important player there,” says Marc Gilbert, who leads the Center for Geopolitics at the Boston Consulting Group (BCG).
The Shock That Wasn’t — And The Shifts Nobody Saw Coming
As the dust begins to settle on a tumultuous 2025, the trade outlook for this year appears calmer. Trump is looking toward the midterm congressional elections, with an electorate fixated on rising prices that his tariffs can only aggravate. Old-fashioned political upheaval could accelerate, though, as the US leader threatens military action in half a dozen countries. “This year should see more economic stability but more geopolitical volatility,” says Cedric Chehab, Singapore-based chief economist at BMI, a subsidiary of Fitch Solutions.
Trump’s 2016 election, followed by the supply chain disruptions of the Covid-19 pandemic, set in motion new megatrends in world trade and international relations: diversification of supply chains to avoid bottlenecks, “China+1” investment—in which companies keep operations in China while expanding production elsewhere—to reduce dependence on Beijing, a US leaning more toward its American neighbors, and South-South trade growing faster than commerce with either of the two superpowers.
All should continue into 2026 unless they don’t: for instance, if Trump decides to tear up the US-Mexico-Canada Agreement (USMCA), which is up for review this year; if China decides the time is ripe to force “reunification” with Taiwan; if Trump reinstates the 10% tariff on Europe that he recently shelved amid European opposition to his Greenland acquisition demands; or if the US Supreme Court, in a case now before it, strikes down the legal strategy underpinning his tariff regime, triggering a torrent of lawsuits by companies seeking refunds of tariffs already paid.
“Every executive in the world is thinking about the balance between efficiency and resilience,” says Drew DeLong, global lead of Geopolitical Dynamics at consulting firm Kearney. “The age of corporate statecraft is beginning.”
Trump turned the world on its head with his April 2 announcement of the eye-popping “Liberation Day” tariffs. By year’s end, the globe was back on its feet, largely because Trump lowered many of his announced duties. The US goods trade deficit fell to multiyear lows in the last few months of the year. But that may have reflected importers drawing down inventories that had swelled ahead of expected tariffs.
For the rest of the world, commerce had a bumper year. According to UN Trade and Development, combined goods and services trade surged by 7% to more than $35 trillion. The price of traded goods rose at a tolerable pace despite rising US levies and actually fell in the fourth quarter. “The rhetoric on trade contraction is way ahead of the data,” says Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics (PIIE).
The US is less important in this picture than it might appear from Washington, accounting for just 16% of global imports, BCG’s Gilbert estimates, although as much as 40% might be “affected” by the No. 1 economy. That includes, for example, components shipped from one Asian country to another for a product ultimately sold in the US.
After US stocks crashed 12% over the week following the April 2 announcement, Trump quickly backpedaled from his Liberation Day targets. Baseline tariffs on major trading partners outside North America—the EU, Japan, and South Korea—settled at 15%-20%. With US manufacturers paying similar rates on imported raw materials or components, the result was something like an even playing field. The Trump administration steadily issued tariff exemptions for irreplaceable imports, including semiconductors and pharmaceuticals as well as coffee and bananas.
China’s Trade Boom
Trump has also made concessions to archrival China, as President Xi Jinping pushed back by threatening to disrupt the flow of essential rare-earth metals. While the US baseline tariff on China remains at 45%, exemptions and carve-outs reduced the effective rate to half that level. “The established trajectory is for the US to end up tariffing other countries as much as China,” says Brad Setser, a senior fellow at the Council on Foreign Relations (CFR) in Washington.
While US policy gyrated, China’s trade trajectory was consistently upward last year. Beijing’s global trade surplus surged by 20% to nearly $1.2 trillion. It offset falling US sales with a more than 10% increase in sales to nations in Southeast Asia, collectively China’s biggest market, and a greater than 8% rise in exports to the EU.
This breakout year capped a decade-long shift in global trade from the US to China. That shift has made export-led growth much more difficult for emerging economies, BMI’s Chehab says. “Ten or 20 years ago, most countries’ largest trading partner was the US, which ran trade deficits,” he says. “Now it is China, which runs surpluses.”
Customers everywhere are seeking instruments to stem the Chinese export tsunami. EU President Ursula von der Leyen has announced a policy of “derisking” from China. Japan is offering “China-exit subsidies” to suppliers who relocate elsewhere. Developing Asian markets are considering sectoral tariffs on steel and strategic products.
Success is unclear. A generation of policy and hard work has made China’s comparative advantage in manufacturing all but unassailable. “Energy prices are quite low, and they can produce on a scale that is incredible,” Chehab says.
China is expanding its dominance into key technologies of the future, particularly those essential for the green-energy transition. Shenzhen-based electric-vehicle champion BYD surpassed US-based Tesla as the global sales leader last year. Total clean-energy exports set new records for the first eight months of 2025, driven by a 75% increase in sales to ASEAN customers, according to industry monitor Ember Energy Research.
The world’s No. 2 economy maintains a lock on other, less flashy but no less essential technologies, from copper alloys to legacy microchips that have become too low-margin to interest Silicon Valley. “Synthetic fibers for apparel, lagging-edge chips: these are the kinds of areas where China says, ‘We are going to win,’” Kearney’s DeLong says.
And then there is the chokehold on rare earths that Xi has already effectively wielded against Trump. “China has got the West over a barrel, as things stand right now,” concludes James Kynge, senior research fellow for China and the World with the Asia-Pacific Programme at the UK think tank Chatham House. “It will take a decade or more to recreate viable parts of the Chinese supply chain in different geographies.”
China could rebalance its trade more effectively through internal policy changes that shift wealth to consumers. Increased purchasing power would boost imports and absorb some excess domestic manufacturing capacity. “The puzzle with China is the absence of imports, whether aircraft or European handbags,” CFR’s Setser says.
The most dramatic effect could come from Beijing instituting pensions and other social-welfare transfers on the model of fully developed economies, PIIE’s Hufbauer says. That does not seem to be on Xi’s agenda. “They do not want to build out a social safety net,” Hufbauer says. “They want to direct resources into frontier technology.”
What Will Happen To The USMCA?
In the US sphere, the main event of 2026 is a review of the USMCA, built into the agreement when Trump signed it during his first term in 2018. The president, true to form, has hinted at annulling the pact, which regulates about 30% of US trade. “We don’t need cars made in Canada. We don’t need cars made in Mexico,” he remarked while touring a Ford Motor factory in Dearborn, Michigan, in January.
But Trump left most USMCA provisions untouched through 2025, and trade watchers are betting the accord will survive with relatively minor changes. US Trade Representative Jamieson Greer struck a more measured tone in congressional testimony in December. “The USMCA has been successful to a certain degree,” he testified. “From the information we have received from interested stakeholders, there is broad support for the agreement.”
“There’s a growing recognition of how important USMCA is,” DeLong says. “The US trade representative received over 1,500 comments from companies. I think it survives with stronger rules of origin and some incentives for specifically US content.”
If so, Mexico could emerge from the current trade upheaval as a big winner, with the North American nearshoring trend accelerating and Mexican President Claudia Sheinbaum toning down her predecessor, Andrés Manuel López Obrador’s, hostility toward business. “This whole story has been great for Mexico,” Hufbauer says. “They’ve improved their position in the US market.”
Over time, the dominance of China and the US in world trade will decline, BCG’s Gilbert predicts. The firm’s 10-year projections show US trade, including services, increasing by 1.5% annually; China’s by 2%; and the rest of the world’s by 2.5%.
One reason is simple arithmetic: India and parts of East Asia are growing faster than China, with explosive potential for both imports and exports. Vietnam’s position as a rising export power seems cemented; its trade volume shrugged off global turmoil, rising nearly 18% last year.
India, so far a domestically focused economy, is the global trade wild card as its economy continues to boom by more than 6% annually and multinational champions like Apple build advanced manufacturing there. “India has improved a lot on infrastructure and the availability of skilled labor,” Gilbert says. “It’s one to watch.”
The EU And Beyond
The world beyond the US and China is also striking back with a wave of diplomacy leaning toward free trade. The EU, sandwiched between Chinese competition and US protectionism, is taking the lead. The EU and India signed a two-way trade agreement on January 27 that slashes tariffs.
Brussels also inked a trade deal with South America’s Mercosur bloc, dominated by Brazil, early this year after a quarter-century of negotiations, although the EU Parliament voted to delay enacting it until it passes a legal review. New Delhi, stung by a 50% tariff Trump imposed as punishment for buying Russian oil, finalized a trade agreement with the UK last year.
London joined the other 11 members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership in late 2024, after Trump’s reelection. The United Arab Emirates, a rising power in the Middle East, is pushing for free trade with almost everyplace except Washington and Beijing. “Trade deals are happening in months that would have taken decades,” DeLong summarizes.
None of that means the world can easily return to the free-trading consensus that reigned in the decades following the Cold War. The supply chain shocks of the pandemic, China’s political assertiveness, and the working-class resentment across the developed world that Trump channels are pushing toward a new paradigm, though its details remain fuzzy at best. “There’s a positioning of economic security as national security,” DeLong says.
On the other hand, no one can repeal the law of comparative advantage in an ever more complex global economy. Experts’ discussions focus on how trade between nations might shift or slow, not reverse. “When you look at the data, you don’t see too much evidence of a global trade shock,” CFR’s Setser notes.
Within the US, Trump did not visibly turn any clocks back during the first year of his second term. Ed Gresser, director for trade and global markets at the Progressive Policy Institute in Washington, points out that both manufacturing employment and manufacturing’s share of GDP dipped in 2025.
Discontent with China’s export juggernaut might take a back seat in the coming years to fears that US-based internet and AI providers will control the global digital high ground, particularly if Washington continues to use it for geopolitical leverage. “The real growth areas in international trade are data and digitization, and it’s not lost on any nation that the US is a leading provider,” BCG’s Gilbert says.
All of the above leaves decision-makers at multinational corporations in an unenviable position: knowing the deck of world politics and trade is being reshuffled yet not knowing what hand they will ultimately be dealt. “C-suites are embedding geopolitics into strategic and capital allocation decisions in a much more formalized way,” Gilbert says. “But large capital outlays are still in the domain of planning and preparation.”
Notable exceptions were the so-called hyperscalers in AI and their suppliers, who are shelling out capital everywhere at once.
Maybe 2026 will bring more clarity. Maybe not.
