The global economy is at a tipping point. Since the beginning of the 21st century, economic interdependence between the United States, China, Russia, and Europe has only deepened. At the same time, geopolitical tensions and mutual distrust have increased. In a hypothetical yet realistic scenario where a full-blown trade war erupts among these great powers, multiple future outlooks emerge that could shake the very foundations of international trade.
“The question is whether Americans can ever understand that we live in a continuous experience with no end, and that life cannot be broken down into separate problems.”
This quote is attributed to the American diplomat and political scientist Henry Kissinger, who passed away at the end of 2023 at the age of 100. The former US Secretary of State and National Security Advisor under Presidents Nixon and Ford would likely have faced a formidable challenge with the current president. According to the White House, the trade war initiated by Donald Trump aimed to tackle various segmented issues simultaneously: high mutual tariffs were meant to generate revenue and balance the budget, isolate China, reshore manufacturing, and, in the case of Mexico and Canada, reduce fentanyl smuggling and illegal immigration. “All of these reasons can’t be true at the same time,” remarked Alex Conant, a Republican strategist and former communications director for Senator Marco Rubio.
A trade war is much more than a conflict between economic powerhouses. It is a global shockwave and a litmus test for the resilience of the international system. The echoes of this struggle reach into the very fabric of Europe, where policymakers, entrepreneurs, and investors are forced to navigate between uncertainty and opportunity. Trump’s protectionist policies are rooted in economic nationalism and deep mistrust of multilateral trade agreements. His inaugural address spoke of “American carnage,” and his administration’s policies were driven by a desire to shield American industry from what he perceived as unfair competition—particularly from China. This led to the sharpest and most sweeping tariff hikes since the Smoot-Hawley Act of 1930. Whereas Smoot-Hawley was the product of legislative inertia, Trump imposed his tariffs with the speed and unpredictability of a tweet—in a far more integrated global economy.
The emotions of Mr Market
That unpredictability continues. After several weeks of turmoil, the US Court of International Trade ruled that most of Trump’s tariffs were unconstitutional. The US government appealed the decision, and a higher court reinstated the majority of the tariffs pending a final ruling.
The immediate consequences are significant. In the real economy, companies face unmanageable uncertainty: should they shift their supply chains, invest in new factories, lay off staff or hire more? The only rational response is paralysis: investment is delayed, innovation stalls, and the engine of the global economy falters. On financial markets, the yo-yo effect is impossible to follow. Investors shrug their shoulders.
The bond markets are less forgiving: the sell-off in US Treasuries and the weakening of the dollar point to deep mistrust in American leadership. Traditionally, investors seek refuge in the dollar during times of crisis, but even that safe haven is increasingly in doubt.
To understand market psychology, one must delve into the concept of “Mr Market”, brilliantly coined by Benjamin Graham, mentor to Warren Buffett. Mr Market is not a rational calculator but an erratic, emotional figure—euphoric one day and deeply depressed the next. He personifies the financial markets, prone to frenzy and panic, to periods of irrational exuberance or despair—a stark contrast to the “efficient market hypothesis”, which holds that markets process new information swiftly and rationally. The question is whether market reactions reflect a cool assessment of economic impacts, or if they are merely responses to the whims of a president whose policies are driven by impulse and improvisation.
A geopolitical dimension
The geopolitical dimension of this trade war is at least as significant as the economic and financial aspects. China responded in kind: tariffs of up to 125% on American goods, hard-line rhetoric, and threats of further escalation. But the US strategy went further: Trump initially sought to rally allies against China by striking bilateral deals, offering lower tariffs in exchange for support against Beijing. In turn, China warned that it would retaliate against any country that entered trade agreements with the US at China’s expense. Thus, the global economy is caught in the crossfire as these two superpowers clash over tariffs. “And the dwarves are left to fend for themselves among the giants’ knees,” wrote Dutch author Cees Nooteboom in “Continent in Motion”.
Europe is left in a bind. On one hand, the EU is a natural ally of the US in defending open, rules-based world trade. On the other, Europe is heavily dependent on both the American and Chinese markets and fears the economic and political fallout of siding with either power. The initial European response was therefore ambivalent. Brussels sought to mitigate the damage with retaliatory measures and firm negotiating positions with Washington. At the same time, a growing awareness emerged that Europe must bolster its economic sovereignty, by investing in strategic sectors and reducing reliance on American technology and financial infrastructure. In this way, the trade war acts as a catalyst for a fundamental rethinking of Europe’s role in the global order.
Escalation and fragmentation
Several future scenarios are conceivable. In the worst-case scenario, the trade war escalates dramatically. The US raises tariffs further on Chinese goods, and China responds in kind. Europe, which initially tried to remain neutral, is forced to choose sides due to US sanctions and Chinese export restrictions. Russia, already subject to Western sanctions, aligns itself with China and curbs exports of energy and strategic resources to Europe and the US. The consequences are far-reaching: global trade flows shrink, supply chains collapse, and consumer prices soar. The West’s dependence on Chinese rare earth metals and Russian energy becomes painfully clear. Western tech firms face shortages of critical components, and European carmakers cut production due to raw material scarcity. The global economy slides into recession, with declining GDP and rising unemployment.
In an alternative scenario, the great powers forge new alliances to strengthen their positions. Europe and China, both affected by US measures, attempt to build a strategic partnership. They sign a tech pact to reduce reliance on American software and semiconductors. Meanwhile, Russia capitalises on its energy leverage by striking deals with both China and Europe, increasing pressure on the West. This realignment results in a multipolar world order where economic blocs compete in technology, energy, and resources. Globalisation gives way to regionalisation: production is brought closer to home, supply chains become shorter, and companies invest in “friendly” nations to hedge against geopolitical risk.
Negotiations and temporary truces
Yet full-scale escalation is not inevitable. In a third scenario, the parties opt for negotiations and temporary truces. China and the EU seek partial agreements on critical materials and technology through diplomatic channels. The US offers its allies, including Europe, a temporary exemption from the harshest tariffs in exchange for concessions in agriculture, technology, or defence. Ultimately, it is on the economic front that hubris may give way to humility for a country that long ago lost its title as the world’s top manufacturer of goods and services. Trump’s negotiating position with tariffs is weaker than he believes, and the rest of the world controls 85% of the global economy.
This pragmatic approach hinges on two milestones. The first is Christmas: tariffs hit toy manufacturers directly. Around 80% of toys sold in the US are made in China. According to UBS, annual US toy sales total about $30 billion. When Trump announced in early May that American children might have to make do with fewer toys at Christmas, it echoed Marie Antoinette’s infamous remark: “Let them eat cake.” The second milestone lies further ahead: the November 2026 Midterm Elections. Republicans risk losing their majority due to Trump’s economic (mis)management. Historical parallels from 1932 and 1982 show that trade wars and inflation can cost political parties dearly at the ballot box. If Trump backs down and pursues a more pragmatic strategy, he could prevent a total collapse of the global trading system. Yet the underlying tensions remain unresolved. Uncertainty persists, companies continue investing in alternatives to Chinese and Russian inputs, and calls for strategic autonomy grow louder in Brussels.
Systemic crisis and currency war
Another looming threat is a systemic crisis and a currency war. Concerns over the Federal Reserve’s independence and Trump’s ongoing personal attacks on Fed Chair Jerome Powell may deter dollar buyers. For decades, investors have relied on the stability of US assets, the cornerstone of global finance. US Treasuries are a safe haven; the dollar dominates global trade in goods, commodities, and derivatives. This system rests on the Federal Reserve’s credibility and America’s robust governance, which has long made foreign investors feel welcome and secure. Trump has replaced these assumptions with genuine doubts.
Make no mistake: the entire world would suffer because the dollar has no true peer, only pale imitations. The euro is backed by a large economy, but the eurozone lacks sufficient safe assets. Fragmented capital markets and limited political integration hamper its role as a dollar alternative. Switzerland is safe but too small. Japan is large but burdened with massive debt. Gold and cryptocurrencies lack sovereign backing.
The dollar-based system is not perfect, but it has provided, perhaps used to provide, the stable foundation of the globalised economy. When investors begin to doubt America’s creditworthiness, those foundations are at risk.
The nuclear umbrella under pressure
Lastly, the nuclear umbrella is under strain. The American nuclear guarantee has long been a cornerstone of European security. Trump’s ‘America First’ approach, his ambivalence about NATO commitments, and his tendency to intertwine economic and security interests have eroded confidence in that guarantee. European countries now openly question whether the US will unconditionally defend them in a crisis, especially when economic interests are at stake. In response, the call for stronger European defence has grown. Initiatives like PESCO (Permanent Structured Cooperation) and debates on a European defence force are gaining urgency. France and Germany advocate greater European control over strategic capabilities, including nuclear deterrence, though this remains politically and militarily sensitive.
Conclusion
These scenarios illustrate that a full-blown trade war between the US, China, Russia, and Europe could have not only economic repercussions but could also reshape geopolitical dynamics. Whether the world moves towards prolonged fragmentation or whether diplomacy and pragmatism prevail will depend on the major powers’ willingness to forge new rules for global trade. One thing is clear: the era of unbridled globalisation is over, and a new, uncertain world order is emerging. To quote the great American novelist William Faulkner: “The past is never dead. It’s not even past.”
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