Trade Scenarios: Growth, Friction, or Standoff?

Read below for three different paths about the future of trade in this edition of Policy Key Scenarios.

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Scenario A: Tariffs Drive Domestic Growth, but at What Cost?

Direct Implications:

• The US implements broad tariffs on imported goods, making foreign products significantly more expensive.

• The External Revenue Service (ERS) begins aggressive tariff collection, increasing government revenue.

Second-Level Implications:

• Domestic manufacturers see a surge in demand as consumers shift toward American-made goods.

• Supply chains are disrupted as companies scramble to replace foreign suppliers with domestic alternatives.

Third-Level Implications:

• Job growth in manufacturing leads to wage increases, but inflation rises due to higher production costs.

• Global companies reconsider investments in the US, wary of long-term trade barriers.

Narrative:
Within two years, US manufacturing is in the middle of an economic revival. The "America First" tariffs made imports significantly more expensive, and consumers, whether by choice or necessity, turned to domestic alternatives. Factories reopened in Rust Belt cities, and once-abandoned industrial towns saw new life as companies ramped up production. The ERS streamlined tariff collection, filling government coffers with revenue from foreign-made goods.

But as American-made products gained market share, businesses faced rising costs. Supply chain disruptions forced companies to build new production facilities, which took time and capital. Some industries struggled to keep up with demand, causing shortages and price spikes. Inflation crept upward, and economists debated whether the newfound manufacturing boom was sustainable.

Meanwhile, foreign companies hesitated to expand in the US, fearing unpredictable trade policy shifts. While domestic production surged, the global business community started treating the US as a less stable trading partner. For many, the new reality was bittersweet—a thriving industrial base, but at a cost.

Scenario B: Bureaucracy Overhauls Trade Enforcement

Direct Implications:

• The ERS centralizes tariff collection, increasing enforcement and compliance measures.

• Businesses face new reporting and payment requirements, leading to higher administrative costs.

Second-Level Implications:

• Companies invest in compliance technology and legal support to navigate the new system.

• Enhanced enforcement leads to an increase in penalties and fines for non-compliant businesses.

Third-Level Implications:

• Some smaller businesses reconsider international trade altogether, opting to focus on domestic markets.

• The ERS becomes a powerful regulatory agency, shaping trade policy beyond just tariff collection.

Narrative:
The ERS has transformed the way US businesses handled international trade. Designed to streamline tariff collection and enforcement, the new agency quickly established itself as a formidable regulatory force. Companies scrambled to adapt to its complex reporting requirements, hiring compliance specialists and investing in software to avoid costly penalties.

While larger corporations managed the transition, smaller businesses struggled. Many opted to reduce or even abandon international trade altogether, focusing instead on domestic markets where compliance costs were lower. The ERS, initially intended as a revenue collector, gradually evolved into a policymaker in its own right, influencing broader trade decisions.

Over time, businesses saw the ERS as both a necessary regulator and a bureaucratic obstacle. While trade enforcement had improved, the complexity of compliance had reshaped the landscape, favoring large firms over smaller competitors. The agency, originally meant to level the playing field, had inadvertently created new barriers of its own.

Scenario C: US Tariffs Spark a Global Standoff

Direct Implications:

• Key trading partners, including China and the European Union, impose retaliatory tariffs on US goods.

• American exporters, especially in agriculture and manufacturing, struggle with declining overseas demand.

Second-Level Implications:

• Farmers, already operating on thin margins, experience major losses as foreign buyers turn elsewhere.

• Companies with global supply chains face increased costs, leading to layoffs and business closures.

Third-Level Implications:

• Trade tensions destabilize global markets, causing economic downturns in both the US and its trading partners.

• Diplomatic relations fray, making cooperation on security, climate, and technology policies more difficult.

Narrative:
The world economy quickly descended into turmoil. After the US imposed aggressive tariffs, its biggest trading partners responded in kind. China slapped heavy tariffs on American agriculture, while the European Union targeted US technology exports. American businesses that relied on international sales saw their revenue collapse.

Farmers were among the hardest hit. Once a dominant player in global agriculture, the US struggled to find buyers for its crops. Wheat, corn, and soybeans rotted in storage while foreign competitors filled the gap. Manufacturers also felt the squeeze—export-heavy industries laid off workers as orders dried up.

The economic pain extended beyond trade. As tensions escalated, diplomatic cooperation suffered. Joint efforts on climate policy stalled, and security alliances grew strained. By the end of the decade, it was clear that the trade war had reshaped more than just commerce—it had altered global society.