We are, perhaps, at the end of the beginning. The tariffs announced by the Trump administration on April 2 will cause significant shifts in the coming months, beyond the initial gyrations caused by pauses on reciprocal tariffs or the rapid escalations between the US and China. 

For companies, though, it's time to recognize that the period of trade liberalization, which began in the 1990s and has been a defining element of global business, is likely drawing to a close. This goes well beyond US policy: The era of ever-freer trade and connectivity has been fragile for years and is now moving rapidly into reverse (see Figure 1). The companies that thrive will be those that can rapidly retool for a world in which the free movement of goods, capital, IP, and people cannot be taken for granted. 

All companies need to reset their commercial and operational efforts within a post-globalization strategy now to adjust to the new normal. Uncertainty will persist, and companies will need to invest in resilience and adaptability to handle it. For those companies that rely on globalized supply chains for goods, matching supply and demand cost-efficiently is now much more critical, with trade policy and uncertainty pushing companies to look for suppliers closer to home.

Amidst shifting supply chains, excess capacity from China and other large exporters will seek new markets, potentially leading to a glut of products in some markets and sectors, with potential for protectionist shifts around the world aimed at protecting domestic industries. Companies also will need to prepare for demand swings, as tariffs and macro conditions remain uncertain and fast changing.

Firms must take this moment to reassess their operations and commercial focus and take a long-term view. Firms directly tied to US imports or exports are setting up urgent “war rooms” to manage the day-to-day. And all companies need to plan beyond tomorrow, creating a blueprint to thrive in the longer term, factoring in continued flux in trade policies and regimes—not just in the US, but globally. Although attention today is focused on the shock effects from the scope and size of the announced tariffs, the knock-on effects could be more profound.

Understanding the uncertainty

While the details of future US trade policy remain uncertain, it is clear that three key intersecting objectives lie at the heart of US actions: restoring the diversity of the US industrial base, establishing balanced and “fair trade,” and strengthening national security.

It's not yet clear if the announced tariff actions will achieve these goals, but if they do not result in material progress, the White House is likely to turn to further tariff or nontariff policies. While most attention has been on country-level tariffs, some products have seen specific policy measures, largely based on their intersection with the Trump administration’s goals (see Figure 2). In the most sensitive product categories, focused on high tech and security, nontariff policies—including incentives, export bans, and heavy regulatory focus—have already been in place for years in both the US and China. 

Figure 2

Recent administrations—both Republican and Democrat—have already deployed a wide array of nontariff policies for critical technologies (incentives, export restrictions, IP restrictions, etc.), and these may ramp up further in tech and other industries. Retaliatory actions may also come in nontariff forms—and other countries may respond in kind, depending on what they think might influence the US administration and where they have material imports.

What happens next?

As we noted in our previous brief (“From China to Trouble”), Mexico and Canada’s deep trade connections with the US, as well as the advantages of a combined US-Mexico-Canada bloc as a larger economy with access to lower-cost labor and a broader set of natural resources, makes the logic of a low-tariff deal clearest for all sides, though there is no guarantee of exactly how negotiations will play out.

Other large economies, such as Japan, the European Union (EU), and India, have more options, but will need to balance domestic priorities against pressure from the US or China. The EU's multilateral decision-making process may make negotiations more protracted and challenging. 

Smaller economies near China will face difficult trade-offs—with high trade reliance today, significant trade with both the US and China, and the potential for the US to pressure them to restrict Chinese goods for low-tariff access. We also expect that China’s domestic priorities will likely make a deal with the US very difficult to reach.

The bigger picture

Beyond individual country outcomes, however, companies should start asking themselves these questions about the bigger picture and knock-on effects of these initial trade actions:

Macro impact

• How have the odds of a recession shifted in the US, Europe, China, and the global economy?
• How will inflationary and deflationary forces play out in different markets?

Retaliatory actions

• Which countries will retaliate (China has made its initial move), and how much will the mutual retaliation escalate?
• How long will this all take (e.g., EU decision processes)?
• Which ex-US moves could be most disruptive (e.g., EU–China trade)?

Capacity absorption (Where will China’s excess capacity go?)

• If tariffs make exports to the US uneconomical in some categories, where will export-oriented production be directed?
• Will capacity addition (in China and other geographies) continue its recent growth trend (thereby increasing instability)?

Post-globalization trade flows, beyond current tariffs

• Already well underway, how much could multipolarity accelerate, and how divergent could the poles become over time (Can you serve only the US or China, but not both?)
• What, if anything, will be the successor to the rules-based world order of recent decades?

Despite the uncertainty—companies need to take short-term action and begin long-term planning for a permanent change in the global system which is underway. We recommend using prediction to drive informed decision making. This includes:

Understanding your exposures. How will your customers and suppliers be affected? What global business practices might be at risk?

Building the options. What short-term levers can you pull to mitigate tariffs and manage your costs? What longer-term investments must you consider in a post-globalization world?

Measuring the risks. What embedded predictions are in each approach? What is your confidence level for those predictions?

Building adaptability and resilience. How can you be more adaptable and respond faster to change? Where do you need to invest in resilience because you have less confidence in your predictions?

Defining the strategy. How do you build our options into a coherent strategy? What is your short- and long-term plan?