Trade wars and tariff disputes: legal challenges and business implications

The intensifying global trade disputes, ignited by actions taken by former US President Donald Trump, could have a profound impact on how some companies source goods or raw materials and may influence the markets they decide to enter or withdraw from.

A key move by the Trump administration was the imposition of a blanket 25 per cent tariff on the importation of steel and aluminium into the United States. Policymakers in several other jurisdictions – including the European Union, China, and Canada – have outlined intentions to introduce countermeasures. Some, such as the UK government, have thus far opted not to respond in kind.

This latest step follows an earlier wave of tariffs introduced by the US on imports from Canada, Mexico, and China. That decision prompted China to retaliate by levying its own tariffs on American imports, primarily targeting agricultural and food products. Relations between the US and Canada have also deteriorated as a result, with Canadian authorities reportedly considering a surcharge on electricity exported to certain US states as part of their response.

The Trump administration has justified these tariffs as a means of addressing America’s trade deficit, which it argues poses a threat to both the economic and national security of the United States.

Trump has pledged to “respond to non-reciprocal trading practices by identifying and imposing the equivalent of a reciprocal tariff against each foreign trade partner”.

Business impact of tariff measures

Given the likelihood of being affected by escalating trade tensions, businesses operating across various industries would be wise to engage in comprehensive scenario planning to help mitigate the most damaging consequences.

The situation remains highly unpredictable. Tariff increases have been imposed against key trade partners, only to be suspended shortly thereafter, reinstated, and then partially relaxed. This inconsistency has created a climate of confusion and commercial risk.

One thing that is becoming increasingly apparent is how challenging it is to reconcile many of these trade measures with the commitments made under World Trade Organization (WTO) rules.

Although the EU, China and Canada have already launched formal WTO disputes over the US tariffs, they have also moved quickly to implement retaliatory measures of their own. The legality of some of these retaliatory steps is not entirely beyond question. While urgent economic or political motives may explain the need for such responses, taking these actions outside the formal WTO dispute settlement framework underlines the ongoing erosion of the global trade governance system.

Global stock markets have already experienced volatility in reaction to the tariff announcements, and to the wider uncertainty introduced by US trade policy. It is well known that a number of businesses have postponed investment decisions, waiting for more clarity before setting out or revising their strategic plans over the short, medium or even long term.

Some companies may now be re-evaluating their supply chains or investment strategies with a view to reducing their exposure to markets affected by the US tariffs. This could, in theory, include shifting further investment into the US itself. However, US-based businesses are also at risk. The reciprocal measures introduced by America’s trading partners will make both importing into and exporting out of the US more expensive.

In a world where supply chains often span multiple borders and jurisdictions, insulating any single business from the higher operational costs and commercial instability brought about by trade wars is a formidable challenge.

The EU’s approach to US tariffs

The European Union’s response to the US steel and aluminium tariffs has been carefully timed. The strategy adopted appears to be designed to provide a window for a negotiated resolution before retaliatory action fully comes into play.

Initially, the European Commission intends to allow previously announced “rebalancing” measures to come into effect, following a period of suspension.

These rebalancing measures were first proposed in 2018 and then again in 2020, after the Trump administration introduced its earlier tariffs on EU steel and aluminium exports. The 2018 response took immediate effect, while the measures announced in 2020 were scheduled to come into force on 1 June 2021. However, once Joe Biden took office, the Commission and the US administration reached an agreement to suspend both sets of measures, with the US agreeing to exempt EU exporters from aspects of its steel and aluminium tariff regime.

That suspension was extended by the Commission towards the end of 2023, but is now set to expire on 31 March 2025. The Trump camp has made clear it no longer recognises the agreement reached under Biden’s leadership.

As a result, the suspension of the EU’s rebalancing measures will officially end on 1 April 2025. Businesses involved in transatlantic trade, if they have not already done so, should urgently examine the tariff classifications listed in the Commission’s implementing regulations, to determine whether the goods they trade may be affected. The scope of the measures is broad, covering items ranging from household appliances such as dishwashers to foodstuffs like cranberries.

In parallel, the Commission is preparing to unveil a new package of retaliatory tariffs targeting US exports to the EU. Officials have pledged to consult with EU member states and industry representatives before finalising the list, which they aim to confirm by mid-April.

The Commission stated that its countermeasures could equal the economic impact of the US tariffs, which it estimates to be worth up to €26 billion.

A blend of industrial and agricultural goods appears to be under consideration for inclusion in the new package. Businesses are encouraged to make their views known during the Commission’s two-week consultation process and to liaise with their respective national governments to ensure their interests are represented in the final version of the package.

Looking ahead

Recent precedent suggests that the window of time before the EU’s countermeasures take effect could be used to explore options for de-escalation between the two sides. Nevertheless, a recent statement from the US Trade Representative – accusing the EU of long-standing opposition to American reindustrialisation efforts and claiming that the EU’s “punitive measures disregard America’s national imperatives” – suggests that significant political and philosophical differences remain between the two allies.

Unless more conciliatory approaches prevail, businesses in some of the world’s leading economies would be well advised to re-examine their supply chains, operational models, and planned investments, to prepare themselves for ongoing instability in global trade relations.