As global protectionism took center stage at the World Economic Forum in Davos, World Trade Organization (WTO) Director-General Ngozi Okonjo-Iweala urged attendees to stay calm amid rising trade tensions, saying, “Please let’s not hyperventilate. Could we chill?”
This advice came shortly before former U.S. President Donald Trump addressed the forum via video, renewing his threats to impose tariffs on trade partners like Europe, China, and Canada. Although markets had initially braced for a volatile response, they remained relatively calm as many saw Trump’s rhetoric as bluffs, with no immediate action on new tariffs.
Throughout the week, financial markets paid more attention to what Trump did rather than what he said. The dollar remained steady, and the offshore yuan even rose slightly as traders took comfort in the fact that the threatened tariffs on Chinese goods were 10%, far less than the previously floated 60%. Wall Street’s fear gauge also stayed subdued, signaling a wait-and-see approach from investors.
China, Canada, and Mexico, the countries most targeted by Trump’s tariff threats, are preparing for potential economic fallout. Canadian Prime Minister Justin Trudeau hinted at retaliatory measures, while Mexico’s President Claudia Sheinbaum called for calm. Meanwhile, China stock investors braced for heightened volatility following Trump’s threats of new levies, with Chinese equities losing some of their recent gains.
Analysts remain cautious about the future. Michael Strain, director of economic policy studies at the American Enterprise Institute, noted, “It’s not just premature, it’s incorrect” to assume that Trump has abandoned his aggressive trade policy stance.
Economists predict that if Trump follows through with his proposed tariffs—25% on Mexico and Canada, 10% on China, and similar rates for Europe—the average U.S. tariff rate would rise to over 10%, up from the current 3%. This could lead to a major reshuffling of global trade flows, a significant economic hit for Canada and Mexico, and an increase in inflation in the U.S.
Major corporations are also closely monitoring the situation. Alcoa Corp., the largest U.S. aluminum producer, expressed concern over the potential impact of a 25% tariff on Canadian aluminum imports, which could have a negative effect on U.S. consumers. Volkswagen AG echoed similar concerns, warning of the harmful impact tariffs could have on both American consumers and the global automotive industry.
Despite the unease, some executives are adopting a wait-and-see approach. Polestar Automotive Holding CEO Michael Lohscheller expressed hope that Trump’s pro-business instincts would prevail and that companies would ultimately benefit from his decisions.
On the global stage, reactions to Trump’s threats were mixed. Mexico and Canada are preparing for potential retaliations, while European leaders, such as Spanish Prime Minister Pedro Sanchez, emphasized the need to strengthen transatlantic relationships and avoid misunderstandings. In Asia, South Korea and India are seeking closer cooperation with the U.S., with Vietnam working to re-balance its trade relationship with America.
One of the more surprising developments was Trump’s softer tone toward China, a crucial trade partner. While China welcomed the absence of immediate tariff hikes, its leadership remains cautious, having taken steps during Trump’s first term to reduce reliance on U.S. trade. “Our mood is more calm, more stable than eight years ago,” said Tu Xinquan, dean of the China Institute for WTO Studies.
As Trump’s second term unfolds, the world is bracing for potential trade battles, while investors, companies, and governments remain on high alert.
