The sweeping tariffs announced by the US on 2 April 2025 – labelled ‘Liberation Day’ by the administration – raised an immediate question in policy circles: would other countries follow suit? Two competing views emerged. One held that countries would be compelled to raise their own barriers to shield domestic industries from trade diversion, particularly from Chinese exports redirected away from the US market. The other held that the mutual gains from free trade are sufficiently large that the rest of the world would sustain the cooperative equilibrium even without its largest participant.

The debate can be framed within a well-established framework in international trade theory. A well-known result is that from any individual country’s perspective, the welfare-maximising import tariff is positive: it improves the terms of trade at the expense of trading partners (Johnson 1951). Quantitative assessments place unilaterally optimal tariffs at 20–62% (Ossa 2014, Costinot and Rodríguez-Clare 2014). Prior to the first Trump administration, observed tariffs were far lower, typically 3–4% for most country pairs (Bagwell et al. 2016). This gap is rationalised as the outcome of a repeated prisoner’s dilemma game: the long-run loss from a trade war when partner countries retaliate deters unilateral defection, sustaining free trade as a cooperative equilibrium. Using a quantitative model, our paper (Bonadio et al. 2026) examines what happens to that equilibrium when the US steps outside it.

The analytical framework

To organise ideas, we first work with a basic multi-country international trade model that admits a closed-form solution for unilaterally optimal tariffs. The optimal tariff for any country is a function of a single sufficient statistic: the export-weighted average of foreign countries’ expenditure shares on the country’s goods. Intuitively, a country’s incentive to impose tariffs depends on how much market power it has in the goods it exports — which is measured by how concentrated other countries’ import spending is on its output. For most countries, this share is small, and optimal tariffs are close to the inverse of the trade elasticity regardless of the configuration of trading partners. We extend prior analytical results (Gros 1987, Lashkaripour 2021, Ignatenko et al. 2025) by incorporating endogenous foreign labour supply, which moderates the terms-of-trade gains from tariffs and lowers optimal tariffs for large economies.

The second component of our analysis is a quantitative multi-country, multi-sector model featuring a global input-output network and trade (Bonadio et al. 2021, Huo et al. 2025), calibrated to OECD inter-country input-output data for 42 countries including an aggregate EU. We use this framework to compute unilaterally optimal tariffs and Nash equilibrium tariffs — which are all countries’ best responses to each other — both before and after a US exit from the free-trade regime. The sustainability of cooperation is measured by the minimum discount factor required to support the cooperative free-trade equilibrium under a grim-trigger strategy as in Mei (2020). A higher minimum discount factor indicates that the cooperative equilibrium is harder to sustain.

Effects on optimal tariffs and cooperation sustainability

Our central finding is that even a complete US exit from global trade cooperation has limited quantitative impact on other countries’ optimal tariffs and on the sustainability of trade cooperation among them.

The mechanism is transparent from the analytical results. The US accounts for approximately 14% of world imports, so its withdrawal rearranges bilateral trade patterns worldwide. However, the key sufficient statistic — the export-weighted foreign absorption share — changes little for most countries. The redirection of trade flows is spread across many trading partners, leaving each country’s exposure to any individual partner, and thus its incentive to impose tariffs, largely unchanged.

Quantitatively, in the baseline single-sector model, unilaterally optimal tariffs for China and the EU rise by less than half a percentage point following full US withdrawal. The minimum discount factor required to sustain cooperation rises from 0.425 to 0.429 for China and from 0.433 to 0.438 for the EU. For the broader sample of other countries, changes are correspondingly smaller. These results are robust to changing the trade elasticity and the labour supply elasticity. A multi-sector model with global production network linkages, which features sector-specific optimal tariffs across 16 tradeable sectors and 41 trading partners, implies lower average optimal tariffs due to the second-best effects of input trade, and a somewhat higher median minimum discount factor of 0.476. However, the qualitative conclusion remains the same in this richer environment: the change in cooperation sustainability from the US exit is modest.

Scenarios with partial US exit

We also consider a more realistic scenario in which the US imposes the import-weighted average Liberation Day tariff of 21% rather than withdrawing entirely. The effects on cooperation sustainability outside the US remain small: the average minimum discount factor rises by approximately 0.01 relative to the 2018 baseline. Figure 1 traces the minimum discount factor for China and the EU as the US tariff varies continuously from zero to 200% and reveals an inverted-U pattern. As US tariffs rise from zero, the required discount factor increases because the US remains a participant in the tariff game and countries face US retaliation if they deviate. However, higher initial US tariffs limit the scope of US retaliation against the deviating country, requiring a higher discount factor to sustain cooperation. Once US tariffs exceed the Nash level, the US would not retaliate to any further deviation by other countries, and the required discount factor declines again.

Figure 1 Discount factor under partial exit of the US 

Notes: The figure displays the minimum discount factor under different initial US tariffs. (Higher discount factor = cooperation harder to sustain.)

A separate scenario examines what happens when other countries exclude the US from their tariff retaliation — as might happen, for instance, due to geopolitical considerations. In this case, China’s minimum discount factor rises to 0.579, a more meaningful increase. The reason is that excluding the US from retaliation reduces both the gain from defection and the loss from a trade war, with the net effect of making cooperation harder to sustain.

How fragile is cooperation?

The minimum discount factors in our baseline are around 0.43 for China and the EU and 0.39 for the average country in the sample. Given a standard annual discount factor calibration in macro models of 0.96, cooperation appears straightforward to sustain. Several considerations, however, caution against this reading.

Policymakers may be effectively less patient than the textbook benchmark implies. Re-election risk can generate present-biased behaviour in trade policy (Amador 2003). Gabaix (2020) introduces the concept of cognitive discounting, under which limited foresight renders agents as-if less patient; the implied annual discount rate in that setting is near 0.5, only slightly above the minimum discount factors we recover. The duration of punishment also matters. Figure 2 shows that with only one period of punishment before a return to cooperation, the required discount factor rises to approximately 0.75. Under grim-trigger strategies, cooperation is highly stable; under short punishment horizons, it is considerably more fragile. 

Figure 2 Discount factor and length of punishment 

Notes: The figure displays the minimum discount factor required as a function of the number of punishment periods before reverting to the cooperation strategy.

Implications

The concern motivating much of the policy commentary since April 2025 has been that a US withdrawal from the cooperative trade regime could set off a cascade of protectionism among the remaining countries, as the terms of the cooperation game change for all parties. Our results do not support this concern. The key determinants of cooperation sustainability — domestic and international trade shares — change too little following the US exit to materially alter the payoffs in the repeated game. This holds across a range of model specifications and parameter assumptions.

Indeed, in the period since Liberation Day, global trade cooperation does not appear to be decreasing. Several significant trade agreements have been announced or concluded since April 2025: the EU-Mercosur agreement, the EU-India trade agreement, and the expansion of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). If the US withdrawal activates this dynamic among remaining countries, it may generate more trade liberalisation rather than less. Our analysis of country incentives suggests the conditions for continued trade cooperation remain strong.

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