Global trade under threat: The impact of US tariff plans

The World Bank and other economic experts warn that proposed US tariffs, including a 10% global levy and specific duties on Chinese, Canadian, and Mexican imports, could hinder global economic growth. These measures, coupled with potential retaliation from trading partners, could lead to a broader economic downturn, especially for developing nations.

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The World Bank issued a warning on Thursday that a 10% across-the-board US tariff could reduce global economic growth, already projected at a lackluster 2.7% in 2025, by 0.3 percentage points if trading partners retaliate with their own tariffs. US President-elect Donald Trump has proposed imposing a 10% tariff on global imports, a 25% punitive duty on goods from Canada and Mexico, and a 60% tariff on Chinese imports. Some nations, including Canada, have pledged to retaliate.

Using a global macroeconomic model, the World Bank estimated that a 10% point increase in US tariffs on all trading partners in 2025 could reduce global growth by 0.2% points, with retaliation deepening the impact. Some external studies suggest that such a tariff hike could “reduce the level of US GDP by 0.4%, while retaliation from trading partners would increase the total negative impact to 0.9%.” However, US growth could experience a 0.4% point boost in 2026 if domestic tax cuts are extended, with minimal global spillover effects.

The Bank for International Settlements echoed this concern, highlighting the risk of “frictions and fragmentation” in global trade, calling a potential trade war between the US and other nations “a tangible risk scenario.” The World Bank’s biannual Global Economic Prospects report projects global economic growth to remain flat at 2.7% from 2024 through 2026, with developing economies facing their weakest long-term growth outlook since 2000. Foreign direct investment levels have been halved compared to the early 2000s, while trade restrictions are five times higher than the 2010-2019 average.

Growth in developing economies is forecast at 4% in 2025 and 2026, significantly below pre-pandemic expectations due to high debt, weak investment, sluggish productivity, and rising climate-related costs. These economies are projected to remain more than 5% below their pre-pandemic growth trend by 2026. World Bank Chief Economist Indermit Gill warned that “The next 25 years will be a tougher slog for developing economies than the last 25,” urging countries to implement reforms to attract investment and strengthen trade ties.

The report also highlighted widening disparities between rich and poor nations, with average per capita growth in developing countries (excluding China and India) lagging behind wealthy economies since 2014. This outlook is further underscored by IMF Managing Director Kristalina Georgieva, who noted that developing economies face significant challenges due to “high global policy uncertainty” and rising trade tensions, which could undermine investor confidence, reduce financing, and slow global growth.

In the context of global economic challenges, analysts suggest that some of Mr. Trump’s tariff threats may be part of a negotiation strategy, designed to pressure foreign nations into concessions rather than being fully implemented. However, Mr. Trump views tariffs as a key tool to reshape global trade and generate revenue to support tax cuts. Achieving these objectives would require broad-based tariffs, potentially impacting a wide range of products and creating significant challenges for importers.

Business groups have expressed concern over Mr. Trump’s tariff plans. Suzanne P. Clark, president of the US Chamber of Commerce, warned that the “broad and indiscriminate use” of tariffs “would stifle growth at the worst possible time.” She further emphasized that “blanket tariffs would worsen the cost-of-living crisis, forcing Americans to pay even more for daily essentials like groceries, gas, furniture, appliances and clothing, and retaliation by our trading partners will hit our farmers and manufacturers hard, with ripple effects across the economy.”

A post-election survey by the Conference Board found that over 40% of the 1,722 corporate executives surveyed identified trade wars as their top geopolitical concern, with a third planning to diversify their supply chains to mitigate risks.

Retail experts and economists have observed that businesses are preemptively importing more products in anticipation of tariffs. However, maintaining large inventories is costly, and with rising interest rates, many companies are constrained by limited capital. Concerns over future tariffs on Chinese imports have also led some companies to relocate their supply chains. For example, Steve Madden, the shoe brand, announced plans to reduce its imports from China by as much as 45% in preparation for further tariffs.