Tariffs risk deepening trade fragmentation across globe

As a new wave of sweeping US tariffs took effect, experts warn that Washington's tariff policy is becoming increasingly institutionalized, a shift that risks deepening the fragmentation of global trade and causing lasting damage to both the US and world economies.

The latest round of tariffs, ranging from 10 to 12.5 percent on imports from 60 economies, was imposed on July 24 under Section 301 of the Trade Act of 1974, seamlessly taking effect after the expiration of the previous 10 percent global tariffs.

The move is part of a concerted effort by the US government to restructure the legal foundations of its tariff strategy, following the Supreme Court's decision in February to strike down its previous reciprocal tariff policy.

A series of further trade measures are anticipated in the coming months, including the ongoing Section 301 investigations into "excess capacity and production in manufacturing sectors" and pending probes initiated under Section 232 of the Trade Expansion Act of 1962 on national security grounds, which could soon translate into new tariffs.

John Ferguson, global head of trade and geopolitics at Economist Enterprise, said the US tariff policy is becoming more institutionalized as the administration seeks a more durable legal footing.

"Measures introduced under Sections 301 and 232 are on firmer ground," he said. "Tariffs imposed under these mechanisms are likely to prove more durable because they follow a well-defined statutory process. That gives businesses greater certainty about how tariffs are imposed, but it also makes them harder to challenge in court."

Tu Xinquan, dean of the China Institute for WTO Studies at the University of International Business and Economics in Beijing, echoed this view, saying the tariff policy is likely to persist for a considerable period, even surviving administration changes. He attributed this to a growing belief in the US that globalization has harmed US interests. "They see tariffs as correcting past errors in trade policy," Tu said.

Daniel Tannebaum, a partner at Oliver Wyman, an international management consulting firm, highlighted the self-reinforcing nature of restrictive policies in an article for the World Economic Forum.

He said the reallocation of capital and production under such policies creates constituencies that benefit from their continuation, making them politically difficult to reverse.

If the US persists with protectionist tariffs for years, experts warned, the result will be a deeply fragmented global trade and supply chain system.

Wang Yong, a professor at Peking University's School of International Studies, said the US is unilaterally discarding the WTO's principle of nondiscrimination to build a tariff framework that serves its "America First" policy, using its market leverage to force concessions from other nations.

Such a discriminatory tariff policy will further erode the WTO's authority and push the global economy back toward a framework governed by bilateral negotiations, he said.

Ferguson said that companies increasingly expect higher US tariffs to remain in place for years. "In response, many are adopting a 'world-minus-one' strategy, treating the US as a distinct market requiring its own supply chains, sourcing decisions, and investment plans, while expanding elsewhere."

This shift is reinforced by other nations' policymakers signing free-trade agreements to signal their commitment to open and predictable commerce, he said.

Bifurcated supply chain

Tu predicted a bifurcated global supply chain. "The sheer size of the US market will compel companies to build industrial systems tailored to US policy, creating a system largely separate from the rest of the world," Tu said.

"Meanwhile, a more open system will emerge outside the US, with the Asia-Pacific and Europe playing key roles. Though more integrated and liberalized, it will remain constrained by the US system. Overall, the global supply chain will become more fragmented and divided."

The economic fallout from this fragmentation is already visible. A World Economic Forum report released in June estimates that current fragmentation is reducing global GDP growth by between $213 billion and $307 billion and raising inflation by 0.2 to 0.3 percentage points.

For the US economy, the costs are also substantial. The Tax Foundation estimates that announced and imposed tariffs will increase household taxes by an average of $900 in 2026 and reduce long-run US GDP by 0.4 percent.

Tu warned that prolonged tariff policies will keep the US economy in a state of high inflation and high costs, raising production costs for US companies and reducing their international competitiveness.

Ferguson said tariffs are likely to weigh on growth over time by reducing trade, competition, and productivity.

"But those effects will take time to emerge. The economy continues to benefit from a powerful wave of investment in artificial intelligence, while trade accounts for a relatively small share of US GDP. As a result, the near-term outlook remains stronger than the longer-term trajectory implied by a more protectionist trade policy."