Global trade is leaving the U.S. behind

Perhaps the most surprising trade policy development of 2025 wasn’t President Donald Trump’s tariffs but rather foreign governments’ refusal to respond in-kind. Although such abstinence is economically optimal, politicians typically embrace tit-for-tat retaliation for political and strategic reasons. So, when only China and Canada followed Trump’s protectionist lead, the relative quiet was an unusual, albeit welcome, result.

It didn’t mean, however, that governments, companies, and even many individuals were standing still. Instead, they "retaliated" in a smarter way: reducing their future reliance on a U.S. that has increasingly embraced protectionism since at least 2016 — protectionism that, ironically, might be helping the very country tariffs were supposed to contain.

America’s departure from the epicenter of global trade began years ago and has accelerated in recent months. According to the World Trade Organization, the U.S. share of global merchandise trade (imports plus exports) in the third quarter(1) was the lowest for that period of the year since 2014, and the drop from 2024 was larger than the cumulative loss between 2015 and 2024. Bloomberg News adds that inbound container volumes through North America — some 80% of which is the U.S. — went "from a world leader to a laggard" last year. Boston Consulting Group projects the trend will continue in the years ahead, with the U.S.’s share of world trade falling from 12% in 2024 to 9% by 2034 because of "policies pursued by the Trump administration."

Even bigger moves are happening beneath the surface, especially regarding China. When Trump fired his opening tariff salvo in 2018, the U.S. absorbed roughly 19% of Chinese exports, but the share tumbled to 11% by the end of last year. China’s total exports and trade surplus have nevertheless continued to grow because exporters there targeted other markets, notably in Southeast Asia (ASEAN) but also in Africa, Europe and Latin America — a move trade economists have dubbed "the great reallocation."

Many of those other nations are trading more with each other and relatively less with the U.S. Last year, Indian exports to China, the Middle East and North Africa increased even as high U.S. tariffs weighed on sales in America. Brazil, Chile, Argentina and Peru enjoyed record exports, owed again mainly to increased trade with China and the rest of the world, not the U.S. Sure, ASEAN nations continue to send big volumes to America, but often as part of an Asian supply chain that depends on Chinese inputs and investment. Today, commerce among developing nations, particularly in East Asia and Africa, drives global trade growth, while North America and Europe stagnate.

The U.S. remains a massive economy, of course, and not every market has followed China’s lead. Canada and Mexico still depend on the American economy and are highly integrated into North American supply chains. The European Union and UK still trade large volumes of goods and services with U.S. and at even higher levels than decade ago.

Yet even these markets are showing some shifts on the margins: Canadian oil sales to China are now booming (and targeting India next), while Canadian tourists are vacationing elsewhere as part of a broader decline in international travel to the US. German firms have resumed investments in China and paused expansions at U.S. affiliates, due at least in part to Trump’s trade policies. European investors are reconsidering their holdings of U.S. financial assets, including the dollar, helping to explain part of the greenback’s broad weakening since Trump’s "Liberation Day" tariff onslaught.

Just as importantly, governments are vigorously pursuing new trade agreements to reduce their economic exposure to U.S. policy volatility. The EU has signed separate free trade agreements over the last 12 months with Mercosur and India, eliminating roughly 90% of bilateral tariffs, and collectively covering almost two billion people and a quarter of global gross domestic product. The EU also updated its trade agreement with Mexico and completed a new one with Indonesia, which itself signed a separate deal with Canada. India completed trade pacts with the UK, Oman and New Zealand, while China upgraded its agreement with ASEAN nations.

The deals are far from perfect, but they’re more detailed, liberalizing and thorough than the vague, one-sided, unenforceable term-sheets initialed by the Trump administration. In many cases, the parties to these agreements, including some of our closest allies, have expressly framed their efforts as a way to hedge against U.S. unreliability. Bloomberg News reported Wednesday that Trump is now privately musing about exiting the North American trade pact, injecting further uncertainty about the deal’s future into pivotal renegotiations involving the U.S., Canada and Mexico. No wonder the Canadian government is so eager to diversify away from its Southern neighbor.

All these deals — along with the dozens of others that have been completed since the Washington last ratified a new Free Trade Agreement — are part of a broader trend of increased global integration outside the U.S.

This diversification is likely good for non-U.S. parties, especially given Trump’s tariff threats and costlier domestic policy alternatives like subsidies. The shift could also be good for the global economy, to the extent it dampens future trade shocks coming from North America. But it is decidedly not good for the U.S. over the short and long term.

For starters, foreign exporters’ access to alternative markets and the US’s declining share of global trade guarantee that American companies and consumers will bear the brunt of Trump’s tariffs, not foreigners. With the U.S. no longer "hegemonic" in global markets, theory predicts that producers abroad respond to American tariffs not by lowering their prices but by diverting trade elsewhere. This is precisely what’s happened: Along with the trade shifts, studies of Trump’s 2025 tariffs ranging from the Federal Reserve Bank of St. Louis to the Tax Foundation show Americans bear most all of the burden via higher consumer prices or input costs.

Then there’s the problem of using unilateral tariffs to counter China. After almost a decade of double-digit tariffs on at least half of all Chinese imports — and even higher and broader since early 2025 — the country is still the U.S.’s third-largest trading partner (fourth if you count the EU as a bloc). And while China’s direct exports to the U.S. declined in 2025, America’s imports surged from Vietnam, Thailand, Indonesia and other countries that absorbed diverted Chinese goods and often incorporated them into items shipped here.

In other words, the tariffs didn’t stop China’s export machine; they just reorganized it, while expanding Beijing’s global influence along the way.

Over the long term, the U.S.’s retreat from the global economy will make Washington less influential, as economic integration deepens elsewhere and other governments set new standards in trade agreements to which America is not a party. It will make the U.S. less resilient, as nationalized supply chains create single chokepoints like the one that caused the U.S. baby formula market to collapse in 2022. It will make America less secure, as the commercial ties that historically reduced armed conflict risk become more brittle and attenuated. And it will make the U.S. poorer, as multinational specialization gives way to duplicative inefficiency.

Others’ refusal to follow Trump’s protectionist lead shows that most governments and companies understand these costs. After 10 years of U.S. retreat from the global economy, it’s unclear if anyone in Washington still does.

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(1) The first two quarters of 2025 were highly volatile for trade, as businesses first rushed to get ahead of Trump’s promised tariffs by frontloading purchases and the reacted to the tariffs.

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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Scott Lincicome is an economist with the Cato Institute. He specializes in domestic policy and international trade.