A trade collapse doesn't make the economy collapse. Like I said, we are not a 17th century trading empire.
Imagine for example that a collapse were to happen in US imports of tube socks from China. We suppose China is producing just as many tube socks but US consumers suddenly decide that they hate Chinese tube socks and refuse to buy a single tube sock made in China. Would Walmart go out of business?
Of course not, they'd just buy up whatever inventories of non-Chinese tube socks are around and put them on the shelves. Then they'd place large orders for tube socks made in England and Vietnam and the US and so forth and three weeks later the socks they ordered would hit the shelves. (Three weeks is the amount of time it takes to ship an item from any industrial location in the world to US shopping locations at bulk rates.) Maybe there'd be a slight blip as a few stores would be short of tube socks for a week but it wouldn't be like in the 70s when there wasn't enough gas to go around, people know that the world has plenty of tube socks.
When the dust settles the composition of trade would have changed slightly and we'd be slightly less efficient but there wouldn't be any loss of economic activity, just a relocation. When previously the tube socks were made in China, now they're being made somewhere else. China would probably start exporting whatever was previously made by the textile mills that are making Walmart's new tube socks. Maybe the textile mills would go out of business but China is fighting inflationary pressures right now which indicates that there are plenty of other goods the laid of workers could start making. The world economy would be a little less efficient but inefficiency doesn't cause recessions, if anything it actually ends recessions.
Now you might say that the situation is different if we are talking about a trade war between China and the US in every good, not just tube socks. But it's just a bunch of the same story told at once, going both ways. And trade wars don't happen overnight so the various commercial and industrial importers and exporters would have time to prepare before the music stops. At the end of the day we get a little less efficient but like I said, that's actually kinda a plus for the US and Europe right now given the Great Recession.
What makes a trade collapse possible is if there are centers of production that have no value without the trade. Think about some colonial era European colony with a valuable colony that produces spices or sugar cane or coffee. The commodity is valuable in Europe so importing it makes the colonial power a lot of money. Then one day a war breaks out that disrupts the import trade. The valuable commodity sits in warehouses in the colony and rots. The warehouses are full so the colony stops producing whatever it was exporting and has no other goods that it can produce. So production is no longer possible. It's not the decline in trade itself that is the problem, it's the decline in output that results. This reduces the wealth in the same way that a major crop failure would.
A decline in Sino-American trade would not cause a decline in output like this. Aggregate supply, the total world's output, would be unaffected, only redirected. Both the US and China would be capable of producing as much as before it's just the US would need to buy more American and China buy more Chinese. Without a reduction in aggregate supply a trade collapse would not lead to a collapse in economic activity and all the bad stuff that entails.
Sorry if this is a bit repetitive, it's been a while since I've read this stuff so I'm doing my best to be thorough so as to avoid mistakes.
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