Tariffs and Policy Volatility: A Dual Threat to U.S. and Global Economic Growth
AdamSummary:
The IMF warns that President Trump’s tariff hikes and policy uncertainty may significantly slow down U.S. and global economic growth, with global GDP forecast to decline to 2.8% in 2025, and U.S. growth dropping to just 1.8%...
Short-term impact of U.S. tariff policy on global economic performance
According to the IMF’s latest World Economic Outlook, the sharp increase in U.S. import tariffs under President Donald Trump is fueling an environment of heightened uncertainty, which is reverberating across global markets. The U.S. economy, projected to grow by 2.8% in 2024, is now expected to slow to just 1.8% in 2025. This sharp downward revision follows the announcement of tariff hikes that pushed average U.S. import duties to their highest level in a century.
The relationship between rising tariffs and lower economic growth appears to be causal. Higher import costs are eroding business competitiveness and raising domestic prices, which in turn suppresses consumer demand — a trend the IMF observed even before the latest tariffs were formally announced.
How U.S. trade policies are affecting other global economies
Major economic regions — including North America, Asia, and Europe — are increasingly vulnerable to economic shocks stemming from the U.S.'s unpredictable and unilateral trade measures. Retaliatory tariffs imposed by trading partners are further escalating tensions and triggering disruptions across global supply chains.
The IMF stresses that no region stands to gain from sustained protectionist policies. Both short-term and long-term consequences are projected to be negative. The parallel trends of rising tariffs and falling growth worldwide reflect a strong correlation, though in many cases, policy uncertainty itself is also an independent variable dragging down economic momentum.
Macroeconomic risk from political interference in monetary policy
In addition to trade measures, political pressure on the Federal Reserve is adding to the volatility. President Trump recently criticized Fed Chairman Jerome Powell and pushed for rate cuts, despite inflation being projected to rise. The IMF has now revised its inflation forecast for the U.S. to 3% in 2025, up from the previous 2%.
Cutting interest rates under rising inflation and higher tariffs could provide a short-term boost in demand but may also deepen inflationary pressures. The link between policy instability and inflation expectations shows a strong correlation, as both investment and consumption behaviors are shaped by shifting expectations.
Strategic outlook: Restoring trade clarity through multilateral cooperation
The IMF underscores that the path to recovery lies in de-escalating trade tensions and forging clear, stable trade agreements. Rebuilding trust in the global trading system is crucial to sustaining economic growth, especially as economies remain fragile in the post-shock recovery phase.
In a press briefing, IMF Chief Economist Pierre-Olivier Gourinchas emphasized that the world may be entering a "new era," where long-standing global economic frameworks are being redefined. But to avoid a prolonged cycle of protectionism, major economies must implement consistent and cooperative trade policies.
As the global economy struggles to regain stability, the U.S.'s aggressive trade measures and pressure on central bank independence are undermining macroeconomic confidence. The ripple effects of rising tariffs extend beyond immediate trade impacts, weakening the very foundations of global growth. The IMF’s warning is clear: without swift policy adjustments, the current direction could backfire on the U.S. economy and jeopardize fragile global recovery efforts.
Source: Reuters
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