Why US Trade War Is Escalating
Introduction
Hello, economic enthusiasts and global trade watchers! Today, I've brought a topic that's been making waves across international markets and boardrooms: the escalating trade war initiated by the US. For years, we've seen policies shift and tensions rise, but what exactly is fueling this persistent push? We're diving deep into the five, or even six, critical reasons why the current administration's trade strategy is not just holding steady, but is actually poised for further escalation. Get ready to unpack the market dynamics, economic resilience, and political undercurrents driving this complex global phenomenon!
One of the most significant factors enabling the escalation of trade tensions is the surprising complacency of financial markets. Despite the rhetoric and actual tariffs, US equities are currently at or near record highs. This resilience suggests that investors are increasingly viewing trade escalations not as a severe penalty, but as the "new normal."
Think about it: when the S&P 500 Index continues to climb (as shown in Figure 1 of the original analysis), it sends a clear signal. The "Trump put," as some analysts call it – the expectation that market sell-offs will be met with policy adjustments – has seemingly fostered a sense of invulnerability. Financial market volatility is near multi-year lows, indicating that the market straitjacket that might normally constrain aggressive trade policies has loosened considerably. This lack of significant negative market reaction essentially gives the administration more room to maneuver and escalate without immediate economic backlash.
Another pillar supporting the trade war's escalation is the robust health of the US economy. Recent data shows a strong rebound in GDP, with a 0.7% quarter-on-quarter growth in Q2, and projections for positive growth in Q3. While Scope Ratings has adjusted its 2025 growth forecast for the US to 1.8%, this figure still outpaces most other advanced economies, with 2026 projections even higher at 2.1%.
What does this mean for trade? It suggests that the current tariffs, though higher than in recent decades, haven't been severe enough to impose effective embargoes or cause significant economic losses. Moreover, the anticipated price rises from these trade barriers have taken longer than expected to meaningfully drive up inflation. This economic resilience provides a crucial buffer, allowing the administration to pursue its trade agenda without immediate, widespread domestic economic pain.
Here's an often-overlooked financial incentive: tariffs are generating significant revenue for the US Treasury. Data indicates that customs duties surged to a record USD 66 billion in Q2, with an additional USD 28 billion collected in July alone. To put that in perspective, last year's monthly averages were less than USD 7 billion!
This influx of cash is not insignificant. It plays a role in trimming the burgeoning US general government deficit, which Scope estimates at an elevated 5.4% of GDP this year. While certainly not a sole solution to fiscal challenges, the direct financial benefit from these tariffs provides a tangible, positive feedback loop for the administration, reinforcing the perceived success of its trade policies. It's a clear financial upside that helps justify the ongoing strategy.
Despite widespread threats of retaliation, the actual responses from US trading partners have been surprisingly limited and, crucially, bilateral rather than multilateral. Only China and Canada have significantly countered US tariffs. Many other governments, including those in the UK and the EU, have shown a reluctance to escalate further, fearing harm to multilateral trading rules, global supply chains, and the potential for weaker growth and higher prices within their own economies.
Instead of full-blown retaliation, many countries have opted for appeasement. We've seen pledges of over USD 1 trillion in US investments, alongside reductions in duties on US imports and efforts to facilitate market access for US goods. This strategy, driven in part by reliance on US security guarantees, has inadvertently strengthened the US position. By preferring bilateral negotiations over a united front, trading partners have allowed the US to divide and conquer, creating a two-tier global trading system that could potentially enhance US trading terms in the long run and help curtail annual trade deficits.
The political landscape within the US is also playing a key role. Concerns among the Republican Party about major losses in the 2026 mid-term elections have eased significantly. The president's approval rating remains remarkably high—around 90%—among his party's voters. Furthermore, the passage of what's been dubbed the "Big Beautiful Bill" has further bolstered the president's political capital.
This strong domestic political backing translates directly into a greater willingness to pursue aggressive trade policies. With a solid base of support and reduced electoral pressure, the administration feels empowered to prioritize its trade agenda, even if it means continued friction on the global stage. It's a classic case of domestic political strength enabling bold international action.
While the US economy and political climate seem to be supporting escalation, it's crucial to understand the broader global consequences. Average US customs duties have soared to 18.6%, a stark increase from 2.5% at the end of 2024 and just 1.5% in 2016. While not quite at the "Liberation Day" highs of nearly 30% from the 1930s, these rates are the highest annual averages since that era (as depicted in Figure 2 of the original analysis). This includes average duties of 15% on advanced-economy trading partners and 21.4% on emerging economies.
This aggressive tariff stance is having a tangible impact on the global economy. Scope Ratings projects a cumulative medium-term reduction in global output of 0.7 percentage points. The effects on the US economy are estimated to be slightly greater at 0.9 percentage points, though re-shoring efforts are expected to gradually trim these costs. For the EU economy, the impact is estimated at a more modest 0.4 percentage points. Overall, 2025 global growth has been reduced by 0.4 percentage points to 3.0% due to these ongoing trade tensions (Figure 3). This highlights that while the trade war may be escalating, it's not without a cost to the interconnected global economic system.
Q2. What role do customs revenues play in the US administration's continued pursuit of trade tariffs?
A. Rising customs duties, such as the record USD 66 billion collected in Q2 and USD 28 billion in July, provide significant revenue that helps trim the US budget deficit. This financial benefit serves as a tangible incentive and justification for the administration to continue its tariff-based trade strategy.
Q3. Why have trading partners' responses been largely bilateral, and how has this affected the US's position in the trade war?
A. Trading partners, including the UK and EU, have largely responded bilaterally rather than multilaterally, fearing harm to global trading rules and their own economies from escalation. Their reliance on US security guarantees has led them to appease the US through investments and reduced duties. This bilateral approach limits reprisal and fosters competition, strengthening the US's relative trading terms in the long run.