The United States has always been the leader of the free world. Certainly, after the extreme swings of recent weeks, it seems that the worst-case scenario regarding tariffs has been averted. However, we should not forget that tariff levels are still significantly higher than they were before Trump’s “Liberation Day,” even if they are not as extreme as initially announced.
A blanket 10% tariff and additional charges on products such as steel, aluminum, cars, and possibly pharmaceuticals would have a significant cost to the global economy.
Even with the 90-day “freeze,” the current escalation could return global tariffs to levels seen in the 1930s — when President Hoover signed the Smoot-Hawley bill and started the last global trade war. It is generally accepted in economics that there are no winners in trade wars, only losers — some simply lose more than others.
Today, the impact of the announced tariffs is clearly inflationary and possibly recessionary. It is highly unlikely that government revenues will increase and manufacturing jobs will return to America immediately — perhaps in the long term. Much will depend on the Fed’s willingness to cushion this self-inflicted economic shock. And on whether Donald Trump will actually deliver on his promised tax cuts.
In Europe and other US trading partners, the shock of the tariffs will be recessionary and deflationary. The impact on already weak export industries is obvious. More difficult to assess is the indirect impact on consumer and business confidence. As other countries try to channel their goods to the EU instead of the US, the risk of a deflationary shock increases. For the European Central Bank, weaker growth and deflation pave the way not only for a rate cut in April, but also for further cuts over the summer.
Europe can no longer hide in America’s shadow
- There is undoubtedly more that we do not know than what we do know.
- How long will these tariffs remain in place?
- Will there be more exemptions or even a relaxation of US threats?
- Will a US recession or further market corrections force the Trump administration to change course?
- How will other countries react — with retaliation, negotiations or mitigation?
- After the Art of the Deal, will the Art of Defeat come?
But the events of the last three months mean much more. Whether we like it or not, whether we turn a blind eye or not, whether we try to understand the unprecedented political and economic moves or not, the US no longer wants to hold on to its so-called “outrageous privilege”. The international geopolitical order is changing. First it was defense and security; now it is trade and the economy.
A historical reminder: it was the US that led the creation of all the multilateral institutions after World War II — such as the IMF, the World Bank, NATO, and the World Trade Organization (or rather its predecessor, the General Agreement on Tariffs and Trade). This created an international order where one dominant power, the US, dictated the course followed by the rest. That era seems to be over and is being replaced by unilateral approaches.
The consequences for the rest of the world and the global economy are difficult to assess. If we try to make a historical comparison, we can see the current situation either as 1989 or as the pandemic. The fall of the Berlin Wall changed Europe and the world forever.
The pandemic was seen as a long-term structural change in the global economy — but it almost disappeared within a few years (with some exceptions such as teleworking). History will tell how lasting the impact of the current period will be. In any case, for Europe, life in the shadow of the US is over.
It is now up to European leaders not to lament this development, but to work for strategic autonomy and their own “outrageous privilege”. The way to achieve this is already quite well known.
The “Beautiful” Tariffs
President Donald Trump sees “beautiful” tariffs as a tool to achieve three goals:
- As a diplomatic weapon to change the behavior of foreign countries.
- As an incentive to bring manufacturing back to the United States.
- As a means of raising revenue to finance future tax cuts for households and businesses.
In any case, branded as America’s “Liberation Day,” Trump’s initiative fundamentally reshapes the landscape of global trade. While its economic consequences remain uncertain, one feature of the policy stands out: it is structured around several principles of game theory.
It exploits power asymmetries, imposes strict time constraints, and fragments coordination among trading partners. In doing so, it is reshaping global trade as a multi-player bargaining game rather than a rules-based system, as was the case in the postwar liberal order.
The announcement of a minimum tariff of 10%, rising to 25% on some products and reaching as high as 145% on most Chinese exports, may bring long-term benefits to the American economy and workers. In the short term, however, it marks a very difficult and potentially damaging transition period for the economy. Financial markets have given their verdict: sharp falls in stock and bond prices, as well as increased volatility, indicate deep concern.
While the tariffs have strengthened security at the borders with Mexico and Canada, they have also sparked resentment, leading to retaliation and in some cases consumer boycotts of American goods and services. For example,
- there is a noticeable decline in flight bookings from Canada to the US.
- At the same time, labor costs and the construction of new factories in the US, including transportation and energy costs, make it doubtful whether significant reindustrialization will take place, except in high-value-added and automated sectors.
- In many cases, it may be cheaper to maintain foreign production centers and either absorb the additional costs or pass them on to consumers.
Regarding the ability of tariffs to raise public revenue, it appears that the administration is targeting $600-700 billion per year, an amount that can cover the extension of Trump’s 2017 tax cuts, which expire at the end of the year. However, taxpayers will not see an immediate increase in their income – they will simply avoid a tax burden in 2026.
Additional tax breaks – such as not taxing tips or reducing corporate tax (likely) and not taxing social security and overtime (less likely) – will not be felt until 2026. Of course, if deals are reached and tariffs are reduced, there will be less fiscal space.
Headwinds to Growth Intensify
Tariff concerns led to a cautious increase in sales of cars, electronics, and other expensive goods in late March and early April. However, American consumers now face three major economic headwinds:
- Erosion of purchasing power due to rising prices of goods (and by extension, some services such as insurance and repairs).
- Rapid slowdown in the labor market (ISM employment indicators shrinking, government layoffs, declining voluntary resignation rates).
- Falling stocks and bonds are causing negative effects on wealth, mainly deterring wealthy households from spending.
So far, investment has remained resilient and could stave off a recession in the first quarter, but heightened uncertainty and lower valuations are making businesses hesitant to invest. At the same time, government spending is expected to be significantly curtailed by cuts being pushed by the Department of Government Efficiency (DOGE).
The net trade balance will be a major drag on first-quarter GDP as businesses increased imports to avoid tariffs. This will ease in the second quarter, but reciprocal tariffs and consumer boycotts of US products continue to threaten export activity. Taking all this into account, Trust Economics forecasts annual growth for the US in 2025 at 1.5% and in 2026 at 1.0% (versus previous forecasts of 2.3% and 1.5% respectively).
Significant interest rate cuts from summer
- As for inflation, goods prices will inevitably rise and we expect the headline index to exceed 4,6%, says Trust Economics.
- There will also be an increase in some services, such as insurance.
- However, rents – which account for 35% of the inflation index by weight and more than 40% of core inflation – will come under downward pressure later in the year.
- Rising unemployment and financial strain on households mean landlords will not be able to continue to raise rents by 4,7%. The Cleveland Fed’s index of new leases is already falling year-on-year.
Based on the transmission mechanism, Trust Economics expects the Fed to gradually become more confident that inflation will return to near 2% by the end of 2026. Fed Chairman Jerome Powell has already said he sees the threat of a more persistent slowdown and a weaker growth profile, but having already cut rates by 100 basis points and with no signs of a crisis in the financial system, the Fed is prepared to “wait and see.” Trust Economics estimates that it will begin substantial cuts in the third quarter and expects total cuts of 125 basis points.
China takes a tough stance
As of this writing, as noted above, Chinese exports to the US are now subject to 145% tariffs, while US exports to China are subject to 125%. At these levels, it is expected that most of the trade that can be substituted will be eliminated, leaving only those products for which there are no alternative suppliers.
Further tariff increases are now more likely to hit the importing country, and China has said it will ignore any further increases from the US. China is already moving towards non-tariff measures, such as tightening export controls and restricting imports from Hollywood.
These measures could be at the heart of any further escalation. There are fears of a hard-line disengagement and an end to the bilateral dialogue, but both sides have signaled that they are open to talks — on their own terms and from a position of strength. In Trust Economics’ view, this is now a test of strength. Whoever “blinks” first will come to the negotiating table from a weaker position.
It remains unclear whether the exemption of smartphones, computers and semiconductor exports (which accounted for more than 20% of Chinese exports to the US in 2024) from the general tariffs will ultimately be considered a “retreat”.
The lack of clarity regarding the Trump administration’s real demands beyond reducing the trade deficit and bringing manufacturing back to the US is an obstacle to the negotiations. As always, the impact of the tariffs is difficult to quantify due to the many parameters. The faster-than-expected escalation, however, shifts the GDP impact toward the upper end of our 0.5–0.9 percentage point range.
It remains unclear how tariffs will affect substitution in China’s exports or re-exports—the cessation of tariffs to the rest of the world is likely to keep re-export channels open at least through the second quarter. Early indications point to a significant decline in orders and shipments, but official data will be delayed by a few weeks.
Many Chinese exporters and U.S. importers are likely on hold, given the past surge in imports and the volatility in tariff news. However, once inventories are depleted, the key question of who will ultimately bear the cost of tariffs will become clear. As we saw in the first trade war, many Chinese exports to the US persisted despite tariffs due to a lack of alternatives. The 145% increase will now clearly show us which part of trade is ultimately irreplaceable.
Policymakers exude confidence
Chinese policymakers have been particularly active over the past month. In particular,
- The “Two Sessions” re-set the GDP growth target to “around 5%,” signaling confidence in the stability of growth despite challenging external conditions.
- At the same time, fiscal policy targets were raised, suggesting stronger support.
- A special action plan to stimulate consumption was soon announced. President Xi said the government aims to “fully unleash” demand.
- The policy focus is on the equipment renewal program, as well as the exchange programs for old products.
- This effort is not going to ease anytime soon; the People’s Bank of China (PBoC) has signaled that it will ease monetary policy further when appropriate.
- The time is ripe and we expect either a rate cut or a cut in the reserve requirement ratio (RRR) in the coming weeks.
- They will likely be done simultaneously for maximum impact on markets.
Fiscal policy may be delayed due to complexity, but any early announcement of significant growth-enhancing measures would be a welcome surprise. There have also been indications that additional measures are in the pipeline. A successful push to revive domestic demand would support industry and help partially fill the gap in global trade. As Trade War 2.0 rages, policymakers remain cool. In the short term, maintaining market stability and supporting vulnerable exporters will be priorities.
Economy held up well in Q1, but risks rise
Surprisingly, March was strong, driving export growth to 5.8% year-on-year in Q1, just below 5.9% in 2024.
According to Trust Economics,
- “barring an immediate tariff rollback, we expect the burden on exports to become apparent in Q2. We are revising our 2025 GDP forecast down by 0.3 percentage points to 4.3%.
- We are also revising our Consumer Price Index (CPI) forecast to 0.0% (from 0.7%), due to increased price competition and worsening oversupply in some sectors.
- The hard macroeconomic data for the first two months exceeded the markets’ moderate expectations.
- Manufacturing and consumption performed better than expected.
- Amid heightened uncertainty, sectors that benefit from exchange policies—automotive, home appliances, home renovations, and consumer electronics—are likely to stand out.
- Overall, success or failure in achieving this year’s growth target will depend on the speed and effectiveness of the policy response.”
Meanwhile, as dark clouds of economic uncertainty gather on the horizon, new data (for the period 7–13 April) shows that activity at Chinese ports has plummeted. Total cargo volume fell 9.7% week-on-week to 244 million tonnes, while container throughput fell 6.1%, reversing earlier gains.
The decline is directly related to President Trump’s 145% tariffs on Chinese goods, which have severely hit exports to the US. Freight rates to the US have collapsed, falling 18% to the West Coast and 10.8% to the East Coast, while freight rates to Europe and South America have risen, suggesting a shift in trade routes.
Trump’s attempt to dismantle decades of destructive globalization marks a paradigm shift—something that happens only a few times a century. The disruptions caused by tariffs are gathering like a storm on the horizon and are expected to spill over into the global economy. We are watching these developments through high-frequency data, which is already signaling problems in China’s export economy and will soon begin to show up in the United States.
