By Valerie Hernandez, International Banker
With US President Donald Trump’s tariffs being levied on virtually the entire planet—from the United States’ biggest trading partners, such as China, Canada and Mexico, to tiny remote Antarctic outposts populated by penguins and seals, such as the Heard Island and McDonald Islands—scarcely any part of the world has escaped the highly punitive trade measures the US president has implemented since early February. And while many of the United States’ harshest tariffs remain on pause at present, the other levies that are still in place and the not-insignificant likelihood of further trade-war escalations in the coming months mean that the global economy will remain under distinct pressure throughout much of 2025 and possibly even well beyond.
Trump’s tariff regime kicked off on February 1 when he signed an executive order slapping 25-percent levies on imported goods from Canada and Mexico, a 10-percent tax on imported Canadian energy and a 10-percent tariff on Chinese goods, before announcing two days later that the same tariffs would be delayed for one month after his Canadian and Mexican counterparts announced that they would bolster security at their borders. By February 9, however, Trump was indicating that any steel or aluminium coming into the US “is going to have a 25 percent tariff”, with those levies eventually coming into effect on March 12, one week after the tariffs on Canada, Mexico and China became active.
Before the end of March, moreover, Trump had threatened the European Union (EU) with 200-percent duties on imports of wine and champagne as the European bloc promised retaliatory tariffs targeting US whisky and other products, in addition to announcing a hefty 25-percent tariff on autos and auto parts manufactured overseas. He also threatened the EU and Canada with “far larger” tariffs if they collaborated to implement retaliatory tariffs, before rounding off the month by pledging to impose “reciprocal” protectionist levies on all nations, rather than on just a modest group of trading partners with the largest trade imbalances.
Then came what Trump called “Liberation Day” on April 2, when he announced sweeping tariffs across virtually the entire trading world, including a 54-percent levy on China, 20 percent on the EU, 24 percent on Japan and 26 percent on India. According to the president, the US had been “looted, pillaged, raped and plundered” and that American industry “will be reborn” in a new “golden age of America”. In the 24 hours following the announcement, the US benchmark stock index, the S&P 500 (Standard and Poor’s 500), plummeted by almost 5 percent, shedding around $2 trillion in market value and experiencing its biggest single-day drop since the outbreak of the COVID-19 pandemic. Trump’s 25-percent tariffs on automotive imports also went into effect.
A 10-percent universal tariff came into force on April 5, before Trump announced on April 9 that he would also bring the remainder of the world’s elevated tariffs announced on April 2 down to 10 percent for the following 90 days—all except for those levied on China. Indeed, the nine days that followed Liberation Day saw a monumental escalation in retaliatory tariffs between the US and China, with Washington’s duties on Beijing jumping to 145 percent and Beijing promptly responding by hiking tariffs on US imports to 125 percent. Almost exactly a month later, the two economic superpowers agreed on May 12 to lower tariffs on each other for 90 days, with the US cutting its duties on Chinese imports from 145 percent to 30 percent and China cutting its tariff rate on US goods from 125 percent to 10 percent.
What does all this chaos mean for the global economy? In short, a lot. Used to an environment of free and predictable trade, virtually the entire world has been impacted by Trump’s increasingly bizarre tariff agenda. Indeed, the International Monetary Fund (IMF) has assessed it as nothing less than a reset of the global economic system under which most countries have operated for the last 80 years, with a new era now dawning. Although the Fund’s latest “World Economic Outlook” (WEO) report considers tariff announcements only up to April 4 (which includes Liberation Day but not the 90-day pause), it nonetheless expects the global economy to grow by 2.8 percent this year, down from its previous forecast of 3.3 percent, and by 3.0 percent in 2026.
Despite the US administration agreeing to 90-day pauses, the heightened uncertainty brought about by the tariff regime that prevails today continues to dent consumer and business confidence across large swathes of the world. “US tariff policy is a serious negative shock for the world in the near term,” Isabelle Mateos y Lago, group chief economist at French bank BNP Paribas, told Reuters on May 5. “The US tariffs end-game may be further away and at a higher level than previously thought,” she said of blanket US tariffs, which remain active at a 10-percent rate, alongside higher, sector-specific duties such as those on steel, aluminium and autos.
Published on May 19, the European Commission’s (EC’s) “Spring 2025 Economic Forecast” projects real GDP (gross domestic product) growth in 2025 at 1.1 percent for the European Union and 0.9 percent for the euro area, which, if achieved, would be broadly in line with the same growth rates attained in 2024. That said, the estimates represent a considerable downgrade compared to the EC’s “European Economic Forecast: Autumn 2024” report, which projected growth rates of 1.5 percent for the EU and 1.3 percent for the euro area. The EC has cited the impact of increased tariffs, the heightened uncertainty caused by the recent abrupt changes in US trade policy and the unpredictability of the tariffs’ final configuration as chiefly responsible for this downward revision.
“This forecast assumes that the high tariffs announced on 2 April will not be reinstated and that US tariffs on imports from the EU and nearly all other countries will stay at 10 percent (the level generally applied on 9 April), except for higher tariffs on steel, aluminium, and cars (25 percent), and exemptions on some products like pharmaceuticals and microprocessors,” the spring forecast stated, adding that EU exports will grow by a modest 0.7 percent this year and by 2.1 percent in 2026, in line with lower global demand for goods.
“This marks a significant downward revision from the autumn projections (at 2.2 percent and 3.0 percent, respectively). Weakness in exports is amplified by competitiveness losses, as well as heightened trade uncertainty,” the EC also confirmed. “Although EU firms are adapting their trade strategies in response to geopolitical tensions and trade fragmentation, many might hesitate to bear the high fixed costs associated with, e.g., product adaptation, regulatory compliance, and finding new distribution networks, necessary to enter new export markets.”
While the rapprochement between the United States and China on May 12 represented a major de-escalation of the trade war, the lack of a lasting deal at this stage means that uncertainty over the direction of future tariff rates, along with the impact of those already in place, will weigh on macroeconomic forecasts for now. “Fitch cut its 2025 global GDP forecast to 1.9 percent last month following April’s tariff escalation and prospects of a concomitantly dramatic hit to US-Chinese trade flows,” Fitch Ratings reported on May 13. “Monday’s [May 12’s] agreement reduces the US effective tariff rate (ETR) from about 23 percent to about 13 percent. While this would imply a smaller hit to global growth, all else equal, it would still be far higher than the 2.3 percent US ETR in 2024, with a near-universal 10 percent tariff and some higher sector-specific tariffs still in place.”
As for global growth outside the EU, the EC’s spring forecast projects a 3.2-percent growth rate for both 2025 and 2026, which is markedly below the 3.6 percent it anticipated in its previous autumn 2024 forecast. “Although trade growth remained robust in the first quarter of 2025, likely due to advance purchases ahead of tariffs, global trade (outside the EU) is expected to expand at a rate well below global economic activity over the forecast horizon,” it added.
It should also be noted that while the US has started a trade war with all other countries, those countries have responded by raising their own import tariffs against only one country: the United States. This asymmetry, therefore, implies that the most profound economic impact will be felt on American shores. “But by starting a trade war on all fronts—a 360° trade war—the US may receive global and cumulative blowback, while other countries will only see an impact on their trade with the US,” Harvard Business Reviewexplained in an April 10 article. “Fighting a narrow trade war is not the same as fighting one on all fronts, as the impacts of both supply and demand shocks accumulate.”