Three Scenarios: Transformations in the Global Economic System After the Washington-Beijing Truce

In the early 19th century, French economist Frédéric Bastiat warned that “if goods don’t cross borders, soldiers will,” implying that the absence of trade can lead to conflict with dire consequences. This warning seemed on the verge of coming true prior to the announcement of a trade agreement between the United States and China in late June 2025. The agreement aimed to halt the escalating tariff war between the world’s two largest economies. At its peak, the trade war saw U.S. tariffs on Chinese goods reaching around 145%, while China imposed 125% tariffs on American imports.

The most notable outcome of the agreement is that it cemented a new global tariff regime: both sides agreed to new tariff levels significantly higher than those before the dispute. U.S. tariffs on Chinese imports will fall to 30%, while China will reduce tariffs on American goods to 10%. Additionally, a punitive 20% U.S. tariff was imposed in connection with the fentanyl issue, with the previous 25% tariff maintained, bringing the total U.S. tariff burden to 55%. Thus, even after the deal, the highest tariff barriers in the history of U.S.-China relations remain part of the “new normal.”

This agreement marks a pivotal moment in the structural transformation of the international economic system, including the reshaping of global supply chains, a re-evaluation of tariff systems and WTO rules, and a strategic race among regional powers to fill gaps and reprioritize their economic agendas. It is necessary to review the current situation and consider where things might be headed.

A Global Shock

At the beginning of 2025, the global trading system experienced its biggest shock since World War II. The escalation of U.S. tariffs broke longstanding norms, as the average U.S. tariff rose from 2.5% in 2024 to about 28% in early May 2025—the highest level in nearly a century. Although bilateral deals with China and the UK temporarily reduced some hikes (bringing the average tariff down to 17.8%), the foundations of the multilateral trading system were severely shaken, with major repercussions including:

1. Collapse of Trade Multilateralism: The Trump administration unilaterally imposed tariffs, ignoring WTO rules and bilateral commitments. This undermined confidence in the multilateral system and raised fears that the WTO’s arbitration role could collapse—what some have called “the biggest shock to trade rules since the system’s inception.”
2. Global Growth Slowdown: Tensions led international institutions to lower their global growth forecasts for 2025 to the slowest pace since 2008 (excluding global recessions). The World Bank cut its projection to just 2.3%, reducing forecasts for 70% of world economies. The WTO warned that fragmentation into competing trade blocs could shrink global merchandise trade by 0.2% in 2025, with North American exports dropping by 12.6%.
3. Efforts to Fill the Void: Other powers moved to either protect or replace the existing system. The EU, for example, has a strong incentive to lead a collective effort to reform global trade rules, in order to maintain a stable, law-based environment for managing tariffs and trade barriers.

Supply Chain Alternatives

The escalating U.S.-China trade war forced companies and countries to reorganize supply sources and seek alternatives to reduce risk. Data shows that U.S. seaborne imports from China fell 34.5% year-over-year in May 2025—the steepest decline since the COVID-19 pandemic in 2020. Conversely, China redirected its exports to other markets, achieving an overall 4.8% export growth in May and a 12% increase in exports to the EU. This shift included:

1. Reshaping the Supply Map: Global companies had to reassess their supply chains. For instance, China’s suspension of rare earth exports affected major industries like automotive, aerospace, semiconductors, and defense. This pushed manufacturers to adopt “friend-shoring” strategies, reducing reliance on China and reinforcing supply chains with trusted allies and partners.
2. Industrial Policy Surge: The trade war encouraged major economies to adopt protectionist industrial policies. The U.S. introduced the CHIPS Act to support domestic semiconductor manufacturing and declared that tariffs aim to bring investments home and strengthen national security. The EU boosted strategic industries with local production incentives, while China continued initiatives like “Made in China 2.0” to promote technological self-sufficiency.
3. Asian and Regional Flexibility: Developing Asian economies benefited from the supply chain shift. Southeast Asian countries, India, Mexico, and others attracted industrial investments seeking to avoid tariff wars. ASEAN adopted a new five-year strategy (2026–2030) to become the fourth-largest global economy by 2045, with a focus on regional supply chains, energy security, and logistics integration to protect against global trade fluctuations.

Global Reactions

The U.S.-China trade conflict and the resulting agreement reshaped the global geo-economic landscape, prompting strategic repositioning worldwide. Reactions varied across Asia, Europe, and the Global South:

1. Asia: Regional Consolidation and Power Rebalancing: The trade war pushed East and Southeast Asian nations to deepen regional cooperation and reduce dependency on Western markets. Countries like Japan and South Korea took tougher negotiation stances with the U.S., while India, Vietnam, and others attracted investment as China alternatives. Trump’s July 7 notification that high U.S. tariffs would soon apply to allies like Japan, South Korea, Malaysia, Indonesia, and Bangladesh marked a new phase in the trade war.
2. Europe: Between Opportunity and Dilemma: Europe found itself caught between two economic giants. On one hand, EU capitals welcomed the trade thaw to ease global slowdown; on the other, they acknowledged that relying solely on the U.S. to lead the global system was no longer viable. Europe began forming trade alliances with Asia and Africa, advocating for WTO reform, and cautiously engaging with China to prevent global polarization. In response to Trump’s July 12 announcement of 30% tariffs on EU imports (starting August 1), EU Commission President Ursula von der Leyen warned of supply chain disruptions and pledged countermeasures to defend EU interests.
3. Global South: Balancing Without Taking Sides: For many developing economies, the trade war posed both risks and opportunities. Most Global South nations adopted cautious policies to avoid alignment with any single power. Emerging players like China and Russia saw a chance to fill the vacuum left by a retreating U.S. role in global governance. BRICS pursued alternative institutions, such as a development bank and independent trade and financial frameworks—deepening global fragmentation.

Future Scenarios

Despite the trade truce between the U.S. and China, questions remain about the global economic system’s future. The agreement is a non-binding framework offering partial and temporary relief. Its impact depends on how the U.S. navigates internal politics and trade disputes, and whether other countries remain committed to multilateralism. A return to pre-war conditions seems unlikely, given the elevated tariffs and persistent uncertainty, especially as Trump announced new tariffs in July on countries like Canada, Mexico, the EU, Japan, South Korea, Sri Lanka, Iraq, Algeria, Moldova, the Philippines, Libya, Malaysia, Kazakhstan, South Africa, Myanmar, Laos, Bangladesh, Indonesia, and Cambodia, effective August.

Thus, structural changes in supply chains and strategic shifts across Asia, Europe, and the Global South are expected to persist. The key question is whether the U.S.-China deal represents a pause before renewed disruption or the start of a new global economic order shaped by new alliances. Three main scenarios emerge:

• Scenario 1: Sustained Truce and a New Trade Coexistence: Washington and Beijing uphold the agreement and expand it into a sustainable, detailed pact. Tariffs remain high but stable, enabling trade flow at higher costs. Bilateral dialogue ensures Chinese commitments on rare earth exports and reform, while the U.S. may ease tech export restrictions under pressure. This would stabilize markets and revive selective investment, possibly even launching a new round of global trade talks to update rules on state aid and technology.
• Scenario 2: Breakdown and Escalated Zero-Sum Competition: One or both sides abandon the deal, leading to renewed—and even more intense—conflict. Trade war reignites, markets plunge, and trust erodes. Other nations would face mounting pressure to choose between U.S. and Chinese markets. Governments would struggle to secure food, energy, and industrial inputs, potentially enacting unprecedented export/import controls. Businesses would suffer huge losses from supply chain turmoil and volatile prices, with bankruptcies likely.
• Scenario 3: Emergence of New Trade Frameworks and Global Governance Reform: An optimistic outlook sees crisis lessons fueling efforts to rebuild a more resilient global trade system. The bilateral deal could evolve into a broader “New Global Trade Charter” that balances security and fair competition, capping tariffs at agreed maximums (e.g., 15%, except in emergencies). This could restore business confidence through clearer rules and stronger guarantees, reviving global trade’s appeal. Though ambitious, this scenario isn’t impossible—if global powers realize that the current path endangers everyone’s interests.

Strategic Lessons

The key question remains: are we facing a fragile deal or a new system? The U.S.-China trade relationship remains unstable. For example, China agreed to resume rare earth exports to the U.S., but only under strict conditions and for six months. Likewise, the U.S. won’t fully lift chip export restrictions but may ease them partially due to joint pressure from Beijing and U.S. tech industries. This means partial decoupling in tech and supply chains will continue even during the truce, as both sides remain wary of overreliance in critical sectors.

The global economic system has entered a turbulent era of restructuring, filled with uncertainties—but also opportunities to reform what has broken. Governments must rethink their trade and development strategies in a world where open markets are no longer guaranteed, nor is protectionism a sustainable answer. Businesses must adopt agile risk management for supply chains and adapt to new rules now forming. International institutions bear the responsibility of bridging divides and re-establishing a fair, balanced global economic governance system.

Regardless of which scenario plays out, several strategic lessons are clear:

1. Economic interdependence is a double-edged sword: While once a peacekeeper, overdependence on a single source without safeguards became a vulnerability. Diversifying partnerships and stockpiling essential goods is now critical.
2. Geo-economic competition is accelerating: National security and technology now dominate trade policy. New international frameworks must integrate economic and security concerns to avoid destructive zero-sum rivalries.
3. No country can manage global economic chaos alone: A rule-based global system is essential. There’s no alternative to multilateral cooperation for rebuilding governance institutions—or else the world risks descending into an economic free-for-all with no winners.

Finally, recent events validate Bastiat’s insight: trade is not just about goods—it’s a safety valve for peace. Recognizing this truth and acting accordingly is the greatest challenge facing policymakers today. The choices leaders make now will determine whether we head toward a fragmented, weakened world—or a renewed globalization that is wiser and more resilient.