US tariffs risk creating a ‘two-track’ global economy

This risks the creation of a two-track global economy: one based on the unpredictability of US trade policy and the escalation of trade disputes; and the other centred around efforts to insulate domestic economies from the harm that US trade policies may cause, by diversifying trade links and reaffirming predictability and stability in their other global trading partnerships.

Strengthening alternative trade alliances

In response to the Trump administration policies, many countries are accelerating efforts to diversify their trade relationships.

The UK-India trade agreement is one example, with the agreement fast-tracked in part due to the uncertainties created by the US trade policy. This deal reflects a broader push by the UK to secure free trade agreements with key trade partners post-Brexit, but its timing is not fortuitous. Whilst previously a number of sticking points in the trade negotiations suggested that reaching an agreement was still months away, the turmoil created by the US tariff hikes policy lent a new urgency to the desire of both parties to find a way forward and do a deal sooner rather than later. The UK has now said that it wants to strike a trade deal with countries in the Gulf.

Long-standing talks between the EU and India have also gained new urgency, with both sides keen to reduce reliance on the US. In addition, the EU has commenced trade negotiations with Saudi Arabia and is reconsidering its engagement with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – a trading bloc made up of 12 countries primarily across the Asia-Pacific and the Americas, in which it previously showed little interest. The UK itself joined the CPTPP in December 2024, aligning itself with a coalition of like-minded trade partners including Japan, Canada and Australia.

A statement of principles – rule of law and predictability

Beyond economic diversification, these moves signal a deeper ideological divide. Countries like the UK and trading blocs like the EU are not just seeking new markets but are also setting out to reaffirm their commitment to a rules-based international order. This was evident in the recent EU-UK post-Brexit cooperation agreement, which explicitly emphasised the importance of predictability and the rule of law in trade.

This was more than diplomatic niceties: both the UK and the EU are publicly taking a stance in light of the perceived arbitrariness of the US trade policy.

Legal pushback in the US

Adding to the complexity, recent US court rulings have challenged the legality of some Trump-era tariffs, on the basis that they may have exceeded presidential authority. The US Court of International Trade found that President Trump’s use of ‘national emergency’ declarations to justify broad tariffs on countries like Canada, Mexico and China was unlawful.

The ruling initially halted the collection of these tariffs and opened the door for potential refunds to businesses that had paid them. The decision was appealed, and a temporary stay was granted allowing the tariffs to remain in place for now. Be that as it may, the case underscores the legal fragility of the US trade policy and adds yet another layer of uncertainty, potentially strengthening further the desire of much of the rest of the world to insulate their economies as much as possible from the vagaries of trading with the US.