After one of the most disruptive years ever for trade in 2025, what are the things we should watch out for which will indicate the direction of travel in 2026?
The impact of the mid terms on US trade policy
US foreign policy has started dramatically in 2026 with the seizure of Maduro and threats to take over Greenland. However, voters in the mid terms may be more focussed on the domestic economy. Experts continue to debate the domestic impact of the US tariffs, but with inflation continuing to bear down on the US consumer, we have already seen reverses by the Trump administration to some of its tariff measures on products making up the weekly shop like coffee, tropical fruits and beef, in the hope that this will slow price rises. Could that start to stretch further as the US faces mid term elections in November 2026; and could the power dynamics between the US and its trading partners start to shift a little away from the US’ almost unfettered ability to impose agreements we saw in 2025? That of course will depend on wider security and diplomatic considerations. In the short term, the US administration awaits the outcome of a Supreme Court case on the legality of its tariff measures, which could also have unpredictable effects.
Prospects for the UK/EU reset
2026 is the year when the “reset” has to start delivering for the Government. The PM has set a target for the next EU/UK summit, in the summer, to agree the key elements of a deal on food standards and on linking electricity markets, to avoid EU tariffs on UK goods affected by the EU carbon border tax. Clearly there are some in the Labour Party, not to mention the Lib Dems, who want to go further and rejoin major institutions of the EU such as the Customs Union or even Single Market. Keir Starmer has rejected this but has made a nod to possible alignment of regulations in some further sectors. However, this could fall foul of EU opposition to “cherrypicking”, and would certainly come at a high price. Any major change beyond what’s already planned seems unlikely before the next General Election, if then, but as long as UK growth bumps along in second gear, these noises will not go away. The politics as much of the economics of Brexit continues to cause ructions both within the Labour party and in positioning towards the electorate.
The knock on global effects of 2025’s disruption
In many ways this is the most interesting and difficult to predict. There are two competing dynamics: a continued fragmenting of the so called rules based system; and a scrambling for alliances in the face of cold economic headwinds. On the first, we have seen the EU take action to protect its industries from foreign competition, both in putting up tariffs on steel as a result of worries that US tariffs will mean diversion of exports, especially from China, to its own market; and in promoting “buy European” policies which are at odds with its international obligations. This has alarmed allies, including the EU’s free trade agreement partners, who fear collateral damage to their own trade with the EU. But the barriers to trade raised by the US have encouraged other countries to accelerate their trade negotiations, or to start trade dialogues, such as that between the EU and the Pacific Partnership, which would have seemed previously unthinkable. The EU/Mercosur agreement, with a group of South American countries, is a test case for which of these drivers – isolationist or coalitions of the willing – will prevail within the EU. The EU has just backed the deal, despite opposition from France, Ireland and several other member states under pressure from their farmers.
China’s record goods surplus
China’s record goods surplus in 2025 has galvanised trading partners. The French President, ironically on a trade mission with French businesses to China, warned in December that the situation is unsustainable. France takes on the Presidency of the G7 in 2026 and has said it will focus on discussion on how trade imbalances can be rectified. Most commentators believe that China needs to create more domestic demand, so as to be less reliant on exports for growth. There are also concerns that it is manipulating its currency to make its exports more competitive. So far China has done little in response to this pressure. Keir Starmer is due to visit China at the end of January, so will be under pressure both from those who want a firm line against China but also those in the Treasury who want to take advantage of any chance to boost UK growth.
And finally – my prediction is that world trade will keep on growing in 2026. The IMF and others initially forecast that Trump’s tariffs would lead to reductions in world trade in 2025, but that will almost certainly not happen, partly because countries did not take retaliatory trade measures, but also because the US actually accounts for only around 15% of world trade. The continuing growth in international trade is a salutary reminder that globalisation is far from dead and business and individuals find ways to keep trading throughout what at first sight look like the most unpromising circumstances.
