Thank God for free trade, as the U.S. shoots itself in the foot

John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.

The numbers are in and the message is clear: free trade is dead and it’s never looked healthier.

It’s dead in that the United States, which led the creation of a Western-dominated trade regime after the Second World War and then spread it globally after the fall of Soviet communism, has decisively turned its back on trade in a quest to bring manufacturing jobs back home. After decades of rapid expansion, which lifted global economic growth rates and living standards and raised billions of people out of poverty, world trade growth has begun slowing.

Although its volume grew by some 7 per cent last year, most of that took place in the middle of the year as importers frontloaded shipments to get ahead of U.S. President Donald Trump’s tariffs. By the end of 2025, growth in goods trade was approaching zero.

It appears that Mr. Trump’s determination to remake the global trading order to the U.S.’s advantage is bearing fruit. Rather than fight his trade war, the U.S.’s trading partners, especially its closest allies, mostly responded to his tariffs by backing down and signing trade deals in which Washington got most of what it demanded. Cue a stream of triumphal tweets from the White House.

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But peer closely at the data and you’ll see that beneath that shrill surface, a very different story is unfolding. Choosing not to retaliate was a sensible option, since the main victims would have been the consumers and businesses of the retaliating country – as is the case in the U.S., where recent studies have shown that American businesses and consumers are bearing almost the full expense of tariffs.

However, while most other countries played nice with Mr. Trump, they also began talking among themselves to diversify their markets. The result of this reorientation was becoming apparent by the middle of last year. As container traffic into and out of U.S. ports declined, elsewhere it surged, with exports from the Far East setting new records. Meanwhile imports into Africa, Europe and the Middle East have risen especially sharply.

John McCown, a trade specialist at the Center for Maritime Strategy who monitors global container traffic, reported that by year-end U.S. inbound traffic had dropped 6.4 per cent over the previous year. But in the rest of the world, trade remains resilient. It’s growing particularly strongly in developing countries, where governments are forming new trade pacts to secure the framework of the World Trade Organization (which Mr. Trump hates). As a result of these developments, in most of the world the U.S. has been declining as a principal trade partner.

Equally, just as countries didn’t respond to U.S. tariffs by launching trade wars of their own, they also chose not to “weaponize” their dollar holdings to punish the U.S. Nevertheless, here as well, organically, the world began slowly shifting out of U.S. assets, not by selling off what they had but by simply buying less of it, especially Treasury paper. And since U.S. debt is continually rising, that excess of supply over demand is now driving down bond prices, sending interest rates higher.

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This helps to explain the decline in the exchange rate of the U.S. dollar and the rise in the price of gold. As their trade with the U.S. falls, other countries not only have fewer U.S. dollars from export sales, but they also need fewer U.S. dollars for import payments. Factor in the growing risk premium being attached to U.S. debt amid the Trump administration’s volatility, and fund managers around the world have been slowly diversifying their holdings away from their previous heavy reliance on U.S. assets.

Add it all up, and world economic growth will slow as the U.S. engine sputters and its contribution to trade declines. However, it won’t stop, and ultimately the U.S. economy will suffer the most harm.

Although some manufacturing may relocate to get behind tariff barriers, its higher costs will make U.S. companies less globally competitive. As a result, American consumers will pay higher prices.

Meanwhile trade volatility may increase as a uniform currency regime based on the dollar gives way to a multiplicity of payment systems. But so far, countries are showing a willingness to work together to improvise solutions. For instance, some analysts detect indications that the Chinese leadership is showing increased sensitivity to the strains put on its trade relations by a weak yuan, and is slowly allowing it to rise in value. At the same time, talk about creating a digital euro that could substitute for the dollar in international payments seems to be finally gaining traction.

In short, as the U.S. is saying no to the global trade regime, the rest of the world is working to shore it up. Therefore, Canada isn’t setting off alone into an unfriendly world. It’s joining an exodus from a land that wants to go it alone.