Free Trade Protectionism: U.S. Tariffs Are Creating a New Trade Policy Paradox
Countries are adopting a more protectionist stance since the U.S. government announced “Liberation Day” tariffs. At the same time, free trade negotiations are increasing, perhaps marking a new trade policy paradox: many countries are protecting their domestic industries from the uncertainty of U.S. trade policy, while simultaneously negotiating free trade agreements (FTAs) with other nations—free trade protectionism. This could evolve into a new global trade order, lacking enforceable generally agreed-upon rules and a bypassed American economy.
The Global Trade and Innovation Policy Alliance (GTIPA), a network of nearly 60 think tanks from all continents and income groups, ranging from Bangladesh to Germany, released a report analyzing how countries are adapting their trade and economic policies. The report reveals common patterns in how economies respond to tariffs: ironically, with both openness and protectionism.
More countries in the Global South, particularly members of the Belt and Road Initiative, such as Bangladesh, Brazil, Pakistan, and South Africa, are turning closer to China. Chinese investments make that easier. Many U.S. allies are also abandoning the United States, seeking to cut their own deals with China with most concerned that U.S. tariffs against China will unleash a flood of cheap, subsidized Chinese goods into their markets.
Policymakers generally prefer to negotiate with the United States rather than retaliating with their own tariffs. Even so, some countries are working to reduce their dependency on U.S. trade and broaden their export market alternatives. The Australian government, for example, launched an expansive policy to boost domestic manufacturing, diversify its supply chain, and accumulate strategic reserves of critical minerals. Meanwhile, Australia is also increasing its engagement with members of the Association of Southeast Asian Nations (ASEAN), the European Union (EU), India, and the UK.
Canada is expanding its West Coast pipeline capacity, enabling oil exporters to bypass the U.S. market. Germany is pressing Brussels to finalize the long-stalled agreement between the EU and Mercosur (a group of South American economies) and to ease requirements in trade negotiations with India and Indonesia. Mexico is leveraging its membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and a modernized EU agreement to boost market access beyond North America.
Free trade protectionism is also occurring in economies that are often out of Washington's immediate attention. Brazil, a founding member of the BRICS, has revived its “neo-industrialization” program, linking new tax credits to local-content rules in the automotive, agricultural, and telecommunications sectors, while also accelerating efforts to secure the long-pending EU-Mercosur agreement and exploring trade talks with Canada. North Macedonia has provided zero-interest loans for its textile and wine sectors and is relying on the Central European Free Trade Agreement (CEFTA), the Open Balkan initiative, and the Berlin Process to foster intra-regional trade. Pakistan is openly adopting an import substitution approach and offering tariff-rebate schemes to firms that commit to local sourcing, but is also courting partners in ASEAN, Central Asia, China, and the Middle East to move toward regional integration.
Given that the United States is the largest and most important player in the global trading system, the shock from President Trumps trade policies are expected to have large and cascading effects. U.S. tariffs are leading to targeted protectionism; nations are pulling back from American markets and seeking new trade partners. This emerging model—free trade among allies, but protectionism toward the United States—may be a preview of the next global trade order: fragmented alliances, bypassed U.S. markets, and a sidelined World Trade Organization.
