The global trading system is undergoing a fundamental shift.The world today has come to resemble the pre-GATT era, as nations engage in tariff wars reminiscent of the 1920s.What began as a wave of “reciprocal” tariffs under U.S. President Donald Trump has fractured organizations such as the World Trade Organization (WTO), signaling the rise of a new economic “iron curtain,” dividing the world not by ideology but by supply chains, tariff regimes, and competing economic models.
Recently, headlines have focused on Trump’s 10 percent blanket tariffs and his sharp escalation to 145 percent on Chinese imports, which has since been matched by Beijing’s 125 percent reciprocal tariff. There has also been a rollback on tariffs on select tech imports such as smartphones and computers, reflecting pressure from the U.S. tech lobby. The rebalancing beneath the surface, however, is more significant. Countries are scrambling to reassess alliances and conformance to economic doctrines as supply chains undergo seismic shifts. Institutions like the WTO have found it increasingly difficult to reverse this trend toward economic fragmentation.The paralysis in the WTO’s dispute settlement mechanism has further accelerated the fragmentation, undermining the possibility of a multilateral solution.
Competing Economic Models
The current trade war has resulted divided the world into camps organized around competing economic models of modern capitalism. The first is U.S. national capitalism, driven by Trump’s economic nationalism, which envisions consumer discipline and industrial rebirth. This approach has abandoned multilateralism in favor of bilateral leverage.
The second is Europe’s technocratic capitalism, rooted in institutional fixes to economic problems. From carbon taxes to digital regulation and green subsidies, the EU seeks to manage globalization through state-backed adjustments. But as the global system fragments, the bloc’s slower pace and regulatory complexity leave it vulnerable.
The third model is Chinese command capitalism: state-backed, centrally managed, and retaliatory. China has responded to Trump’s tariffs with a high level state intervention. After the April 9 tariff escalation, Beijing devalued the yuan and deployed its “national team” of state-backed investors to stabilize equity markets. It also announced a 500 billion yuan bank bailout – the first systemic recapitalization since the 1990s. The message is clear: Beijing will fiercely protect its economy from the U.S. tariffs.
Other Asian nations are crafting a fourth model: pragmatic pluralism. Rather than picking sides, they are seeking engagement with all major powers, while experimenting with their own economic policies. This includes a warming up to multilateral trade agreements like the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and a quiet effort to diversify trade exposure away from the United States. The bloc’s swift reconsolidation around trade frameworks such as RCEP and CPTPP places ASEAN economies at a relative advantage compared to Europe’s slower institutional responses. ASEAN’s creation of a ministerial Geoeconomics Task Force seeks to secure long-term regional strategy, while its reaffirmation of the U.S.-ASEAN Trade and Investment Framework ensures institutional continuity in its diplomacy with Washington.
ASEAN ministers and central bank governors are coordinating policy responses across multiple fronts – from tariff stability to capital flow management. By criticizing Trump’s tariffs as “disruptive” and pledging non-retaliation, ASEAN is reflecting a calculated economic approach grounded in pragmatic pluralism. By opting for negotiation and non-retaliation, ASEAN has positioned itself as a stabilizing bloc in an increasingly volatile trade environment.
Asia’s Pragmatic Hedgers
As the trade war heats up between major powers, Asian countries are stepping away from rigid alignment in favor of flexible engagement. Rather than retaliating or retreating, these countries are adapting with a mix of economic realism, diplomatic agility, and selective state intervention.
Japan, one of the closest U.S. allies in East Asia, and facing a 24 percent tariff that has temporarily been lowered to 10 percent under a 90-day grace period, is testing the waters with a calibrated strategy that combines caution and acquiescence under the umbrella of pragmatic pluralism. In an attempt to woo Washington, Tokyo is considering moving forward with a long-delayed $44 billion LNG project, with the possible involvement of South Korea and Taiwan, in order to reach a trade deal with the U.S. In addition, the ruling coalition is also considering a sales tax cut on food to provide immediate relief for the population.
While creating a task force to lead negotiations with the Trump administration, Japan is also calling for cooperation with ASEAN member states. Prime Minister Ishiba Shigeru’s visits this week to Vietnam and the Philippines highlight Japan’s strategic calculus: prioritizing personal diplomacy, economic engagement, and rule-based ties in Southeast Asia over confrontation or isolation. As global supply chains shift, Japanese companies are exercising caution and pragmatism. Mitsubishi Motors has suspended deliveries to U.S. dealerships as a precautionary move, while Meiko Electronics is expanding operations in Vietnam to support Apple’s shift to India, quietly repositioning itself with the emerging realignment. Other Japanese companies operating in the U.S, such as Miki House, have planned to remove Chinese made goods from their inventory altogether.
South Korea, in another case of pragmatic pluralism, is using a policy that mixes state-led intervention with strategic realignment and diplomacy. The government has announced a $10 billion emergency support package for the auto sector, including tax breaks, low-interest loans, and extended EV subsidies. At the same time, the car sales tax has been temporarily lowered to 3.5 percent to enable automakers to access new export markets. The Bank of Korea is considering easing monetary policy later this month, citing trade war risks.
These moves come at a time when Beijing has warned of retaliatory measures against countries striking bilateral trade deals with Washington — raising the stakes for Seoul’s balancing act between strategic alignment and economic pragmatism. As South Korea seeks a resolution with the U.S., acting President Han Duck-soo has floated an LNG investment in Alaska and shipbuilding cooperation as bargaining chips with the Trump administration. South Korea is the world’s second-largest shipbuilder, specializing in high-value vessels like LNG carriers, and its major firms are now considering investments in American shipyards.
Vietnam, hit with a 46 percent U.S. tariff, has followed a middle course under the umbrella of pragmatic pluralism – balancing global alignments while asserting its domestic economy. Much like Trump’s “economic nationalism,” which aims to streamline bureaucracies and cut public funding, Vietnam is pursuing one of the boldest hybrid reforms in Asia: it is actively merging provinces, abolishing ministries, and dismissing tens of thousands of civil servants to streamline its bureaucracy and improve its economic competitiveness. While this predates the trade war, this dramatic reformation is a clear signal of Vietnam’s agility and its determination to position itself strategically between Washington and Beijing amidst rapid geopolitical shifts. While Vietnamese officials engaged in trade talks in Washington this month, Vietnam hosted China’s Defense Minister Dong Jun and President Xi Jinping. Hanoi has also bolstered ties with Beijing through China-backed infrastructure. The signal is unmistakable: in a fragmented trade order, flexibility is increasingly defining survival.
The Philippines, facing a 17 percent tariff rate, has responded with interest rate cuts and supply chain outreach, whilst simultaneously enhancing military cooperation with the Trump administration. Rather than aligning with a single bloc, the Philippines is strategically hedging: maintaining security ties with the U.S. while welcoming economic cooperation from European Union, which is stepping up engagement with Southeast Asian nations, including the Philippines, as part of a broader effort to coordinate responses to American trade pressure. Here is another textbook case of pragmatic pluralism: hedging against uncertainty by engaging multiple powers without committing to any one power.
India, balancing a $46 billion trade surplus with the U.S. and deep ties to Silicon Valley, has avoided retaliation, despite facing a 26 percent tariff and being labeled a“tariff king” by Trump. It is quietly working toward a bilateral trade agreement with the U.S. in addition to reducing tariffs on selected U.S. goods. The world’s fifth-largest economy has also taken a hybrid approach: avoiding escalation by opening up to trade talks and lowering interest rates to signal monetary support. Apple’s expansion in Tamil Nadu and Karnataka highlight India’s role in a tri-polar economic order where countries are quickly adapting to supply chain disruptions.
Even Pakistan, one of the largest importers of American cotton and Beijing’s close partner, is seeking dialogue with Washington to leverage export disruptions caused by U.S. tariffs. It is also experimenting with a hybrid model, providing subsidies whilst simultaneously aiming to create bureaucratic efficiency.
Restoring Multilateralism: A Path Beyond Polarization
The ongoing trade war is just the latest indication of a major shift in the international system. If the underlying causes are not addressed, an imminent fragmentation reminiscent of pre-World War I economic rivalries could unfold. The WTO, which is crucial to preserving a multilateral trading system, has suffered somewhat from mismanagement, allowing members like China to exploit loopholes under the “developing country” clause. China’s manipulation of WTO rules – through forced technology transfers, opaque subsidies, and anti-trust measures through state owned enterprises – has helped catalyze the rise of U.S. “national capitalism.” This has precipitated an erosion of trust in WTO mechanisms, prompting many nations to question the organization’s effectiveness.
Trump’s strategy of forcefully restricting American consumption, particularly when the U.S. has, for the past half a century, remained a consumer society, shows little promise of being a sustainable solution. A sustainable strategy would require cooperative rather than coercive policy measures.
While selective exemptions on tech imports do show some flexibility, a renewed commitment to genuine multilateralism is the need of the day. This selective flexibility indicates an admission by Washington that absolute isolation is impractical, an admission that opens the way for multilateral solutions.
Asia’s counter-balancing strategies are only stop gap arrangements. Platforms such as the RCEP and CPTPP offer realistic, consensus-driven alternatives to fragmented bilateral deals, potentially restoring some semblance of economic stability through multilateral engagement.The potential inclusion of the EU in the CPTPP, supported by Japan and the U.K., reflects a growing G6+ momentum – a coalition of democratic economies seeking to safeguard rules-based trade in the face of rising economic coercion.
History shows that aggressive tariff regimes – like the Smoot-Hawley Tariff Act of 1930 – lead to a spiral of protectionism, fractured alliances, and ultimately, geopolitical instability. The greater risk lies ahead in the slow erosion of interconnected markets and the rise of isolation as policy. The world needs consensus-driven multilateral cooperation, not enforced isolation, in order to achieve durable economic stability.