Key messages:

• Tariffs, trade negotiations and policy-related economic volatility are here to stay, as US policies seek to bring about significant structural changes to reduce its trade and fiscal deficits.  An escalating trade war could weaken global consumption, delay business investment decisions, disrupt supply chains and threaten overall global activity and trade.

• US household consumption, a key driver of global growth resilience, is at risk from the shifts in trade policies and budget cuts. Elsewhere, the EU and China have announced much-needed fiscal support to stabilise their domestic economies, which may partly offset the significant external headwinds.

• Emerging Asian economies are highly exposed to trade wars, not only to the direct impacts of tariffs and indirect impacts of a global trade slowdown but also to the interconnected supply chains with China. Economies dependent on foreign capital are vulnerable to financial market volatility and risk aversion.

Introduction

The exceptional changes in US geopolitics, trade and economic policy since early 2025 are reverberating across the globe. The global economic outlook has become more uncertain, as the current international world order and terms of international cooperation, which have been the norm since the 1980s, are recalibrated.

The US imposed a universal tariff of 10% on all trading partners, with additional “reciprocal tariffs” on about 60 countries, and sector-specific tariffs on the automobile, steel and aluminium sectors. While the “reciprocal tariffs” have been paused, the risk of reimposition looms, while several other sectors like semiconductors, pharmaceuticals, copper, and lumber are also under review for additional tariffs. If fully implemented, the sweeping tariffs will bring US import tariffs to the highest level since at least the 1930s (Figure 1). These shifts will also drive a rethink of global supply chains, accelerate deglobalisation, and reduce corporate profits and consumer purchasing power.

Figure 1: US effective tariff on imports jumped to a high not seen since the 1930s

Trade frictions put global growth at risk

The direction and extent of US tariffs remain difficult to predict. Nonetheless, the latest policy changes hint at a new era of American protectionism, with tariffs being used to address the US administration’s broader goals of reducing trade and fiscal deficits and increasing US employment, demanding significant structural shifts for the global economy.

US protectionism acts as both a demand-side and supply-side shock for the global economy, denting worldwide trade and activity. The two major contributors to resilient global growth over the last two years—the strength of the US consumer and emerging markets—are both likely to come under strain.

In its most direct impact, tariffs increase the prices of imported goods. A review of the 2018 tariffs by the US International Trade Commission showed that higher costs of the tariffs were mainly borne by American consumers or absorbed by American importers and manufacturers,[1] while having little impact on export prices in China. Higher retail prices lowered demand for the tariffed products, shrank trade volume and trimmed employment in the affected sectors.

Given that the increase in tariff rates is more aggressive now than in 2018-19, the dampening effect of higher import prices and inflation on the purchasing power of US consumers will be more significant. With household consumption accounting for 80% of US growth in 2024, and with the US having a roughly 30% share of global consumption, this has significant implications for the global growth. Estimates indicate that the real GDP growth impact of US universal and “reciprocal” tariffs could be about 1% for the US[2], about 2.5 for China[3] and 0.3%-0.5% for the Eurozone[4], in their first-order effects. Global GDP growth could slow to below 2% in 2025, from 3% in 2024, with global recession risks if trade wars escalate.

Evidence from the 2018-19 US-China trade war shows that bilateral tariffs had far-reaching negative impacts on third-country upstream suppliers within the manufacturing supply chain.[5] In addition, the heightened uncertainty creates supply-side shocks, paralysing supply chains and activity, and delaying business investment and hiring decisions. This, in turn, lowers consumer confidence and spending and, ultimately, activity across the globe.

Global growth is also likely to be persistently lower in the medium to long term. The WTO estimates that a continued decoupling between the US and China could drive a 2.4% contraction in global trade and a 7% long-term reduction in global real GDP growth compared to a no-decoupling scenario.[6]

Increased cost of goods and disrupted supply chains raise stagflation concerns

The direct impact of tariffs raises the retail price of imported goods to the US, with the announced “liberation day” tariffs expected to raise PCE (personal consumption expenditure) inflation in the US by 1.4 – 2.2 percentage points in their first-round impact.[7] Moreover, disruptions in supply chains, leading to supply shortages and delays also raise the cost of goods. This is already reflecting in consumer inflation expectations (Figure 2).

Evidence from past tariffs shows that shutting out cheaper foreign competition often leads domestic producers to raise prices too, due to a sudden increase in demand. For example, the 2018 tariffs on steel and aluminium caused domestic steel prices to rise by 5% and aluminium by 10%. Even as global demand fell subsequently, the gap between US and worldwide prices remained wider until these tariffs were later reduced.[8] The higher cost of raw materials substantially raised costs for downstream users. For instance, Ford and General Motors faced more than USD1 billion in higher costs or about USD700 per vehicle produced in North America.[9]

Figure 2: The US consumer inflation expectations have risen sharply

Global economies are increasing support for domestic growth

As external headwinds are on the rise, global economies have turned to fiscal policy to increase support for domestic growth.

In the EU, fiscal stimulus could fortify the sluggish growth recovery. A shift in the US’ geopolitical policy has pushed a rethink of EU fiscal policy, with a planned increase in defence spending to the tune of EUR 650 billion over four years.[10] More crucially, Germany, the largest economy, announced a significant fiscal stimulus of EUR 500 bn, or around 12% of Germany’s GDP, towards infrastructure development. While growth spillovers of defence spending tend to be lower, infrastructure spending is expected to bring much-needed growth support to help stir the German economy out of the technical recession of the past two years. While real wage growth has been positive in the EU, more policy support may be needed to boost consumption spending, especially amid heightened global uncertainties.

The impact of US import tariffs on China is considerable, though manageable, considering the US accounts for 15% of China's exports. At the same time, the Chinese Government has been accelerating policies since early 2025 to support domestic demand expansion. For example, the fiscal deficit is geared to reach a record-high of 4% of GDP in 2025, with support going to consumer durables, infrastructure, property sector and debt repayments. A 30-point plan to boost consumption through trade-in plans, subsidies, Hukou reform and a potential hike in the minimum wage has also been announced. There are signs that these measures are bearing fruit. China’s activity data, including retail sales and investment, recorded improvements in Jan-Feb 2025, while property sector indicators continue to point to a bottoming out. However, risks for the growth outlook, driven by the external growth slowdown, remain considerable and may need further government support.

Asian Emerging markets’ high dependence on exports for GDP growth, as well as a high exposure to the US market, makes them vulnerable to changes in US trade policy. About 18% of the region’s exports are directed to the US, particularly in tech, autos and consumer goods. Regarding export exposure to the US, Vietnam, Malaysia, Thailand, and South Korea are the most vulnerable (see Figure 3). Traditionally, a 1% decline in US growth translates to a ~0.5% decline in growth for the trade-sensitive Asian economies. However, the impact of tariffs is further complicated by the interconnected nature of the regional supply chains. The big picture of US-China decoupling creates additional ripple effects throughout Asia's entire regional supply chain.

Figure 3: Asia exports to US as % of GDP