Trade Wars, Pandemics, and World Wars: Modelling Disruption in Global Trade

No Time and No Place for 'Beggar-Thy-Neighbour' Tariffs in Today’s Interconnected World

Introduction

In the past century, global trade has been repeatedly jolted by events ranging from policy-driven trade wars to exogenous pandemics and all-out world wars. Each type of disruption has tested the resilience of the international trading system in distinct ways. The world’s march toward deeper economic integration, fuelled by decades of globalisation, means that any shock can ripple widely and rapidly. For instance, trade now accounts for over half of global GDP, a dramatic rise from about 5% in the 1940s (when World War II decimated commerce)

Tariffs, viruses, and tanks have all managed to throw sand in the gears of global trade, albeit through different mechanisms and magnitudes. Understanding these differences is crucial for policymakers modelling future disruptions and crafting effective responses. This article compares three archetypal shocks: trade wars, pandemics, and world wars, to distil insights on their economic impact and the policy lessons gleaned from each.

Trade Wars: Tariffs and Tit-for-Tat Consequences

Modern trade wars are policy-induced disruptions. A prominent recent example is the U.S.–China trade conflict, marked by reciprocal tariffs on hundreds of billions of dollars of goods, along with U.S. commodity-specific duties (e.g. steel and aluminium). In theory, a country with market power might gain from an “optimal tariff” by improving its terms of trade, as classic trade models suggest. In practice, however, trading partners retaliate, and the skirmish often devolves into a negative-sum game. Game-theoretic models liken trade wars to a Prisoner’s Dilemma: each country’s unilateral incentive to impose tariffs leads to a non-cooperative equilibrium where both sides are worse off. The economic outcomes of the 2018–2019 U.S.–China tariff exchanges bear this out. Studies find that these tariffs reduced aggregate real income in both countries (roughly 0.1% of GDP in the U.S. and 0.3% in China). This impact is modest in relation to the size of those economies, but it is nonetheless negative. In fact, the U.S. Congressional Budget Office projected that the full array of trade barriers in place by 2020 would lower U.S. real GDP by about 0.5% and raise consumer prices by 0.5%, effectively reducing average household income by $1,277 that year. Empirical analyses confirm that American consumers bore the brunt of the tariffs through higher prices, with estimates indicating that 75–100% of the tariff costs were passed on by businesses to purchasers. Indeed, the tariffs acted like a tax on U.S. importers and consumers, contributing an estimated 0.3–0.5 percentage points to core inflation in 2018–2019. The result was effectively a regressive tax that hit household budgets even as it protected a narrow set of industries.

From a trade balance perspective, tariffs achieved little lasting gain. The U.S. trade deficit shrank slightly during the trade war, but only by about 1.3–1.5% of GDP, and this effect was temporary. Fundamental macroeconomic drivers (like national savings and investment rates) remained unchanged, so any improvement in the trade balance soon faded. Meanwhile, U.S. exporters suffered retaliatory barriers abroad, and some lost market share. Notably, U.S. merchandise exports to China declined sharply in 2018–2019, including a 53% drop in U.S. agricultural exports to China in 2018 as Chinese retaliatory tariffs took effect. Overall, global trade growth slowed markedly, with world merchandise trade essentially stalling in 2019 (growing only about 1%, the weakest performance since 2009), as escalating U.S.–China tensions dampened business confidence (Lu, 2020).

Yet trade wars also trigger adaptive responses in the private sector. To avoid tariffs, companies reconfigured supply chains and sourced inputs from alternate countries. U.S. imports from China fell by around 25% from 2018 to 2020, while imports from Vietnam, Mexico, and other suppliers surged. Vietnam’s exports to the U.S. jumped by over 35% during this period, illustrating how one country’s pain became another’s opportunity. This trade diversion benefited certain third-party economies, even as the U.S. and China saw overall trade volumes with each other decline. American firms, such as Apple, began implementing “China+1” strategies, adding production sites in places like Vietnam or India, to reduce their overreliance on China. A survey found a record 27% of U.S. companies planned to relocate operations out of China at the height of the dispute. Such shifts, while enhancing resilience against geopolitical risk, are costly. Firms faced higher input expenses and inefficiencies when moving away from established low-cost suppliers. For example, U.S. automakers reported rising costs due to tariffs on imported metals (General Motors estimated billions in added expense). In short, the trade war necessitated a painful realignment of global supply chains without resolving the underlying imbalances it was intended to address. It underscored how protectionist policies, billed as tools to revive domestic industries, often backfire: they raise costs for downstream industries and consumers, invite retaliation, and ultimately undermine economic welfare on all sides.

Pandemics: The COVID-19 Trade Collapse and Recovery

If trade wars are policy frictions, pandemics are exogenous shocks that simultaneously affect supply and demand. The COVID-19 pandemic in 2020 delivered an unprecedented jolt to the global economy, and trade volumes contracted at a record pace. At the pandemic’s peak, roughly half the world was in lockdown, straining every link of the global value chain. On the supply side, factory shutdowns, border closures, and quarantine measures halted production and logistics worldwide. On the demand side, mass layoffs and falling incomes suppressed consumption, while uncertainty led firms and households to cancel orders. Global merchandise trade declined by over 5% in 2020, including a staggering 27% year-on-year drop in the second quarter alone. This collapse rivalled the steepest declines of the 2008–09 financial crisis. Foreign direct investment fared even worse; global FDI flows declined by 42% in 2020 as multinationals slashed capital spending and profits plummeted. Trade in services (especially travel and tourism) also evaporated due to mobility restrictions. By any measure, COVID-19 represented the sharpest peacetime contraction in international trade in living memory. The highly optimised, just-in-time supply networks of the globalised economy proved acutely vulnerable to a systemic shock of this nature. A single missing input or delayed shipment cascaded into production stoppages worldwide, highlighting how tightly interconnected and fragile supply chains had become.

Crucially, however, the pandemic-induced trade collapse was short-lived, thanks to extraordinary policy responses and the adaptability of firms. Massive fiscal and monetary stimulus in major economies propped up incomes and demand, preventing a complete free-fall. By late 2020, global trade had begun to rebound faster than many had expected. The World Trade Organisation’s worst-case forecasts (a 12.9% drop for 2020) were far too pessimistic; the actual decline in world trade volumes was only about 5.3%. Swift government action (including emergency spending and credit backstops) and a general refrain from new trade protectionism helped stabilise trade flows. Indeed, unlike the 1930s, most countries did not respond to the crisis with beggar-thy-neighbour tariffs, perhaps recalling the dire legacy of interwar protectionism. By 2021, world merchandise trade had largely recovered to pre-pandemic levels. The COVID shock also accelerated certain trends: the rapid shift to remote work and digital services cushioned the blow for sectors that could operate virtually, and demand for medical goods spiked (turning trade in personal protective equipment into a rare bright spot). Trade impacts varied across regions: notably, many Asian economies managed a quicker trade recovery (aided by effective virus containment and strong electronics exports to meet “work-from-home” demand). In contrast, regions such as Europe and Latin America experienced deeper and longer-lasting trade disruptions, reflecting both severe outbreaks and a heavier reliance on contact-intensive industries.

Even as trade volumes bounced back, the pandemic exposed structural vulnerabilities in global supply chains and imparted lasting lessons. Certain critical bottlenecks, especially in shipping and semiconductors, persisted well into 2021. A shortage of shipping containers and port congestion caused freight costs to skyrocket, resulting in delayed deliveries worldwide. The most infamous choke point was microchips: a lack of semiconductors (as factories in Asia stalled) forced major automotive plants in the U.S. and Europe to halt assembly lines, revealing a dangerous single-point-of-failure in the supply chain. These disruptions had inflationary repercussions. As supply shortages met resurgent demand, prices for goods rose. Market power shifted toward larger “superstar” firms that could outbid others for scarce inputs. Research suggests that up to 23% of U.S. inflation in 2021 was attributable to supply-chain-driven increases in market concentration and pricing power. In other words, big firms with diversified supplier networks weathered the storm better, securing supplies and even expanding market share, while smaller firms struggled, and consumers ultimately paid more. The pandemic thus highlighted how supply-side shocks can amplify existing market inequalities, an insight of relevance to competition policy and inflation modelling.

On the positive side, COVID-19 has spurred a strategic rethinking of resilience in trade and investment. Diversification has become the mantra: companies and countries alike are pursuing “China+1” sourcing strategies, regionalising production, and building in redundancies to avoid overdependence on any single supplier or nation. There is a new premium on flexibility and visibility in supply chains. Firms accelerated the adoption of technologies like AI and advanced analytics to better monitor supplier risks and manage inventories. Inventories, which have been kept razor-thin under just-in-time models, have been beefed up for critical inputs. At the policy level, many governments are weighing safeguards for essential goods (from medical supplies to semiconductors), including onshoring production or maintaining strategic stockpiles. In summary, the pandemic taught the world that pursuing efficiency at all costs can backfire when a crisis arises. The optimal trade models of the future will likely factor in more robust risk management and the trade-off between efficiency and security.

World Wars: Total War and the Remaking of Global Trade

Global conflict represents the most extreme trade disruption, i.e., a complete breakdown of the international economic order. World War II caused a collapse in trade far beyond anything seen in a tariff spat or even a pandemic. Unlike the targeted nature of a trade war or the transitory shock of COVID-19, a world war brings widespread physical destruction of factories, cities, and infrastructure, alongside commandeered economies refocused on war production. The impact on trade is catastrophic. During World War II, global trade volumes are estimated to have plummeted by about 65%. By 1945, world merchandise trade had shrunk to an insignificant share of global output. Trade as a percentage of world GDP had fallen to only around 5%, the lowest level in over a century. (For comparison, that openness ratio was around 14% before World War I and is over 50% today.) This collapse was the culmination of a longer unravelling of trade during the interwar period. Following the prosperity of the early 1920s, the Great Depression dealt a severe blow to global commerce, as world trade declined by roughly one-third in the early 1930s. Retaliatory protectionism, exemplified by the U.S. Smoot–Hawley Tariff of 1930, exacerbated the downturn. By 1934, world trade had contracted by an appalling 66% from 1929 levels. Instead of providing relief, high tariffs and quotas “suffocated” trade and deepened the economic crisis. This collapse in global exchange and the nationalist economic policies behind it set the stage for geopolitical hostility and ultimately WWII.

Once World War II erupted, trade patterns splintered along alliance lines and vast swathes of peaceful commerce ceased. Many sea lanes were closed by blockades; belligerent nations cut off imports of non-essential goods and sought self-sufficiency where possible. Countries outside the main conflict zones also experienced a sharp decline in trade due to shipping risks and wartime scarcities. By war’s end, trade was decimated, and the very capacity to trade was gone in many regions: factories lay in ruins, fleets had been sunk, and human capital was devastated. In Europe and Japan, industrial output was so crippled that these economies could barely meet domestic needs, let alone export. Wartime command economies had also upended normal market function. The war left a legacy of financial ruin: hyperinflation ran rampant in several defeated nations (e.g. Japan’s wholesale prices rose over 10,000% by 1948), and many countries accumulated crushing debts. Currencies collapsed in occupied Germany, and cigarettes became a de facto currency for exchange. The global monetary order was in disarray, with acute shortages of gold and U.S. dollars (“the dollar gap”) impeding trade and reconstruction. In short, World War II represents an absolute worst-case scenario for global trade: a structural collapse that required nothing less than a complete rebuilding of the international economic system from the ashes.

Paradoxically, the immense destruction of the war paved the way for renewal. Chastened by the failures of the interwar years, world leaders in the 1940s consciously designed new institutions to revive and stabilise trade. Even as WWII was still raging, the Allied nations convened to plan a postwar economic order founded on cooperation, not conflict. The result was the 1944 Bretton Woods Conference and its progeny, the International Monetary Fund (IMF) and World Bank, to ensure monetary stability and finance reconstruction. In 1947, 23 nations signed the General Agreement on Tariffs and Trade (GATT), marking the beginning of an unprecedented era of tariff reduction and trade liberalisation. Under U.S. leadership, the rules-based multilateral trading system emerged, reversing the protectionist tide of the 1930s. This new framework facilitated a remarkable trade boom: global trade grew multi-fold in the post-World War II decades, far outpacing overall economic growth (Our World In Data, 2014). The share of trade in global GDP increased from its wartime base of 5% to approximately 20% by the 1970s, and has continued to rise in recent years. The world economy underwent significant structural transformations, from colonial empires to independent developing states, and from inter-industry trade (trading distinct goods) to the rise of intra-industry trade and increasingly complex multinational supply chains. Much of this was enabled by the peace and stability (at least among the great powers) following World War II, and the cooperative regimes created in its aftermath. In contrast to a trade war or pandemic, which disrupt the status quo but leave the system’s architecture intact, a world war obliterates the status quo. World War II thus stands apart in terms of scale of disruption and in that it forced a complete reimagining of global trade governance. The war taught, in the starkest manner, that economic nationalism taken to extremes could be fatal to prosperity and peace. The post-1945 institutions were explicitly meant to prevent a repeat of the interwar spiral by binding nations into a liberal economic order, an order that, for several decades, delivered unprecedented growth in international trade and incomes.

Comparative Insights and Policy Lessons

Despite the very different nature of trade wars, pandemics, and world wars, there are some common threads in how they disrupt global trade. All three events expose vulnerabilities in our interlinked economic system. Whether it is a tariff or a virus or a tank, when a shock hits one part of the network, the effects propagate widely. Each scenario produced supply chain dislocations and initial spikes in costs or prices: tariffs drove up import costs for businesses and consumers, COVID-19 shutdowns created supply shortages in everything from chips to shipping containers, and wars created absolute scarcities of goods (often leading to rationing and price controls). In each case, policy uncertainty also surged, whether it was uncertainty about tariff schedules, lockdown policies, or wartime resource allocation, causing firms to delay investments and reorder their priorities. Furthermore, all three types of shocks had inflationary aspects, although through different channels. Trade wars transmitted inflation through direct price increases on imports (a tariff pass-through to consumer prices). Pandemics did so by curtailing supply and boosting certain demand (e.g. for goods over services), leading to supply-push inflation in bottleneck-affected sectors. Total wars have historically led to inflation through both scarcity and governments' monetisation of debt. For example, wartime finance often involved printing money, which often resulted in post-war inflation spikes. In all cases, global investment tends to pull back in the face of such turmoil. During the 2018–19 trade war, U.S. firms' planned investments in China hit record lows amid uncertainty. During the 2020 pandemic, worldwide FDI plummeted. And during WWII, cross-border private investment was virtually non-existent (and had to be jump-started after the war via programs like the Marshall Plan).

The sheer scale of decline (two-thirds down in the 1930s–40s) underscores that systemic crises necessitate systemic rebuilding, whereas lesser shocks, although painful, can be absorbed with the system largely intact.

The Great Depression and World War II saw world trade collapse by approximately 65% or more, far exceeding the declines during the 2009 Global Financial Crisis or the 2020 COVID-19 shock. The 2018–19 U.S.–China trade war caused only a very minor dip in overall trade volumes (Lu, 2020), although specific sectors and bilateral flows were heavily affected.)

The key divergences among the three phenomena lie in their origins, duration, and long-term effects. Trade wars are man-made, often politically driven, and (one hopes) reversible through negotiation. They tend to impose a drag on growth and efficiency without completely derailing the system. The U.S.–China tariff battle, for example, shaved off a fraction of GDP and reshuffled some supply chains, but global trade still grew (albeit slowly) during that period, and the basic institutions of trade remained intact. A pandemic is an external shock that causes a steep but relatively short-term collapse in trade. As we saw with COVID-19, trade can rebound quickly once the public health crisis is managed; however, the experience leaves a lasting legacy in how businesses and governments plan for resilience. Pandemics can also act as catalysts for change (for instance, accelerating e-commerce and digital trade, or prompting diversification of suppliers). World wars, by contrast, are transformative. They obliterate existing trade relations and often necessitate a complete “reboot” of the global economic order. After WWII, global trade was restored and reimagined on new principles of liberalisation and multilateralism, leading to structural innovations like GATT. The time horizon of impact also differs. Trade wars and pandemics, while disruptive, tend to be seen as temporary shocks (lasting years at most); in contrast, a world war causes long-term, structural shifts. It took decades after WWII for global trade to fully recover and then surpass pre-1914 levels, but that recovery coincided with profound structural changes (decolonisation, Cold War blocs, the rise of new economic powers, etc.).

For policymakers and trade modellers, these comparisons yield important lessons. One is the value of international cooperation vs. unilateralism. The interwar period’s failure showed that if every nation turns inward (raising tariffs or embargoes) in a crisis, the result is a downward spiral that makes everyone worse off. The post-WWII success, conversely, demonstrated the payoff from cooperation, with countries committing to reduce trade barriers together, achieving far greater prosperity than any beggar-thy-neighbour strategy could. Today’s trade wars hint at the same: according to economic models, if the U.S. and China had resolved their differences cooperatively rather than via tariff salvos, both would have been better off. There is thus a game-theoretic imperative for strengthening rules-based regimes (like the World Trade Organisation) to help governments resist protectionist temptations. Another lesson is the need for resilient supply chain design. The pandemic underscored that efficiency cannot be the sole criterion; rather, redundancy (multiple suppliers, larger inventories) and agility (the ability to pivot production) are critical for weathering shocks. Governments may encourage this by coordinating on stockpiles for key goods and by crafting trade agreements that facilitate diversification (for example, plurilateral deals on medical goods supply). For firms, the lesson is to invest in better mapping of supply networks and stress-testing them, much as banks do for financial stress scenarios. Modern trade modelling is starting to incorporate such network dynamics, drawing on lessons from the disruptions of the 2020s.

Finally, the historical perspective highlights that crisis can be an opportunity. World War II’s aftermath gave rise to institutions that prevented trade tensions from escalating for decades. Similarly, the COVID-19 crisis sparked a debate about updating trade rules for the 21st century, including new disciplines on export restrictions for medical supplies and frameworks for digital trade and e-commerce, which proved so vital during lockdowns. It has also reinvigorated discussions on balancing global integration with domestic security (for instance, in critical technologies). The challenge for today’s policymakers is to bolster the global trade architecture in light of these insights. That means shoring up the WTO and multilateral cooperation to manage trade conflicts (so that disputes over steel or technology don’t spiral into damaging trade wars). It also means jointly addressing weaknesses exposed by the pandemic by making supply chains more transparent and coordinated, possibly creating early warning systems for supply disruptions, much like those for financial crises. The future may see a more cautious form of globalisation: a “multi-hub” global economy where regions trade extensively within themselves and maintain buffers against far-flung shocks. Trade, in other words, could become slightly less hyper-efficient but more robust.

Conclusion

“Modelling disruption” in global trade is not a theoretical exercise confined to textbooks. It is the lived reality of the past five years (and indeed the past century). Trade wars, pandemics, and world wars each stress the international trading system in unique ways, but they also offer invaluable data and lessons. A trade war shows how easily political motives can override economic logic, and how even the strongest economies cannot win a tariff fight without hurting themselves. A pandemic demonstrates the fragility of an overly optimised system and the speed with which an unforeseen shock can bring trade to its knees, but also the power of innovation and policy to foster a rapid rebound. A world war reveals the absolute extreme of disruption, yet also the capacity for humankind to learn from catastrophe and build anew. For trade professionals and policymakers, the task ahead is to apply these lessons: to reinforce the global trade system’s guardrails against self-defeating protectionism, to incorporate resilience into the sinews of supply chains, and to maintain the spirit of cooperation that has historically helped the world climb out of even the deepest economic trenches. In an era when trade itself is sometimes weaponised, whether via tariffs or tech restrictions, it is worth recalling that global trade, when managed wisely, is not a zero-sum contest but a cornerstone of shared prosperity. Steering through the next disruption will require deft modelling, but also a commitment to the kind of farsighted, collective action that turned the chaos of the 1940s into the unprecedented growth of the post-war decades. By heeding the warnings and wisdom from trade wars, pandemics, and world wars alike, we can strive to make the global trading system more efficient, as well as more secure and equitable, for whatever storms lie ahead.

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