How to avoid "retry storms" in distributed services?
It depends on what you're trying to avoid.

If you are trying to avoid any service interuption of something which is a genuinely critical service (I'm thinking in terms of "people will die if my API call is not appropriately served") the you need to just budget for the huge inefficiencies that come from vastly over provisioning dedicated resources. And yes they have to be dedicated, none of this allowing for traffic spikes stuff, multiple services spiking would thus cause an outage.

In the far more likely scenario that you're service going down would be inconvenient you can tackle the problem both from the client and server sides. Although it's worth noting that it's logically impossible to actually solve the problem of to much traffic because without processing the traffic (which consumes resources) you can't know if it's a retry, if it's a retry for a request that was successful but incorrectly handled by the client, if it's a DDOS, etc. But you can mitigate impact.

In the client code write sensible retry logic which has an upper limit and a mechanism for gracefully failing. That way you don't stick your users in an infinite loop of failing requests and you just give them an error telling them to try whatever they just did in little while.

For your server side infrastructure the simplest solution is to throttle. Hard limits on requests, especially if you can try and spread them logically based on your specific use case (ie. If you have a centralised service make some hard decisions, do you want to start blocking geographically distant requests which might be resulting in threads hanging server side? Or do you want to distribute your inevitable yet minor outage evenly? etc) It basically boils down to the fact that returning a 503 intentionally from a gateway is a hell of a lot cheaper than letting the request go through and sending a 504 anyway. Basically force clients to behave based on what you can currently provide and provide the correct responses so that clients can react appropriately.