"Analysis" Trump's new round of tariffs will exacerbate the global economy

As Trump imposes tariffs, the global economy is already showing signs of weakness.

There are concerns that the tariff measures are detrimental to economic growth and exacerbate price pressures.

Long-standing questions about the role of the United States in the global economy are becoming increasingly prominent.

LONDON, April 2 (Reuters) - The latest round of trade tariffs announced by the United States on Wednesday will further weaken the vitality of the world economy. The global economy has just begun to recover from the surge in inflation following the COVID-19 pandemic, only to be weighed down by record debt and troubled by geopolitical disputes.

Depending on how U.S. President Trump and other world leaders act now, it could also be seen as a turning point for the globalization system. So far, the globalization system has taken for granted the strength and reliability of the United States.

However, in the coming months, thousands of goods purchased and sold by global consumers and businesses will be subject to new taxes, leading to price increases that will suppress demand.

Antonio Fatas, a macroeconomist at INSEAD, said: "I think this is the United States and the global economy sliding into worse performance, more uncertainty, and possibly heading towards what we could call a global economic recession."

"We are entering a world that is worse for everyone because it is less efficient," Fatas stated. He has served as an advisor to the International Monetary Fund (IMF) and the World Bank.

U.S. President Trump announced on Wednesday that he would impose a 10% base tariff on all goods imported into the United States and higher tariffs on some of America's largest trading partners, escalating the trade war that began after he returned to the White House. Trump displayed a poster listing the reciprocal tariff rates imposed on different countries, with a 34% tariff on China and a 20% tariff on the European Union. He also confirmed earlier that a 25% tariff would be imposed on automobiles and auto parts.

Given that Trump has previously hinted that this may only be the beginning of negotiations, the outcome is uncertain, making it difficult to calculate the potential impact of this move.

IMF President Kristalina Georgieva stated at a Reuters event this week that she believes the global economy will not experience a recession in the near term. She added that the IMF is expected to make a slight downward adjustment to its global economic growth forecast of 3.3% for 2025.

However, given that tariff rates range from 10% in the UK to 49% in Cambodia, the impact on different countries' economies is bound to vary significantly. If the result is a broader trade war, it will have a greater impact on producers like China.

If tariffs push the U.S. itself into recession, it will deal a heavy blow to developing countries, as their fates are closely tied to that of the world's largest economy.

"What happens in the U.S. will not be limited to the U.S.," said Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley. "The U.S. economy is too large, and its connections to the rest of the world through trade and capital flows are too tight for the rest of the world not to be affected." Figure: Contribution of Key Areas Affected by Tariffs to the Economies of Various Countries or Regions

"Upside Down World"

For policymakers at central banks and governments around the world, the ripple effects could be enormous.

The disintegration of supply chains that have controlled prices for billions of consumers for years could lead to inflation rates "heating up" to levels above the 2% manageable target that central bank presidents currently agree upon.

Economies with weak output growth will make it even more difficult for governments to repay debts and find funding for budget priorities such as defense spending, climate action, and welfare. Global debt has reached a historic high of $318 trillion.

Given that the U.S., close to full employment, is already facing a domestic labor shortage, what if tariffs fail to achieve the goal that Trump has long claimed of encouraging companies to invest in U.S. domestic manufacturing?

Some believe that Trump is seeking other ways to eliminate the U.S. global trade deficit, which frustrates him greatly, such as urging other countries to join in rebalancing foreign exchange rates in favor of U.S. exporters. Freya Beamish, chief economist at investment strategy firm TS Lombard, said: "We will continue to see him propose potentially riskier methods to address the ongoing strength of the dollar."

These measures could jeopardize the dollar's privileged status as the world's preferred reserve currency—few predict such an outcome, if only because there is currently no real alternative to the dollar.

Nevertheless, European Central Bank President Christine Lagarde stated on Wednesday that Europe needs to act immediately to accelerate economic reforms in order to compete in what she calls an "upside down world."

"Everyone has benefited from the U.S. as a hegemonic power, which has previously committed to establishing a rules-based multilateral order," she said, referring to the post-Cold War era of global economic openness, low inflation, and trade growth. "Today, we must face closure, division, and uncertainty."

Figure: Emerging Market Bond Risk Premium Rises Due to Tariff Concerns