The ‘Liberation Day’ tariff measures announced by US President Donald Trump on 2 April 2025 have reintroduced protectionism to the centre of global economic discourse. The prevailing sentiment among economists is one of concern, with predictions of rising inflation, heightened trade uncertainty, a potential global recession and broader dismantling of the international trading order.
The global economic repercussions have varied across countries, shaped by their positions within international trade networks. The Trump administration’s ‘America First’ policy reflects a broader shift toward unilateralism. In this evolving landscape, many countries may find regional and multilateral cooperation the most pragmatic strategy to manage growing global uncertainty.
Initial responses from global financial markets were unequivocally negative. By 3 April, Wall Street had witnessed a loss of approximately US$2.5 trillion in value, with markets around the world also falling significantly.
The bond market appears to have priced in the risks associated with Trump’s tariff war, as reflected in the sharp rise in US 10-year Treasury yields following the 2 April announcement. It signals increased recession expectations and, to some extent, erosion of investor confidence in US government bonds as a safe haven. Though the bond market would favour a rate cut by the Federal Reserve, the Fed faces a conundrum amid expectations of both higher inflation and economic recession.
Beyond short-term market reactions, Trump’s tariff policy is a massive blow to the global economic architecture, challenging the post-World War II trading system that was created by the United States itself. The longer-term macroeconomic implications are likely to be far reaching.
One foreseeable consequence is further fragmentation of global supply chains. Tariff and retaliatory measures create heightened uncertainty, which in turn raises the cost of investment. Normally firms exhibit strong preferences for liquidity and aversion towards risk and loss. In an increasingly protectionist environment, they are more likely to respond by restructuring their supply chains and reshoring production.
Additionally, when such reshoring leads firms to move production from the developed economies to markets with lax regulation and lower productivity, product quality reduces. The broader welfare implications stemming from efficiency losses due to decreased specialisation and reshoring could be substantial. A slowdown in global trade along with fault lines emerging in the trade network appear probable.
Inflationary pressures are likely to be stronger in countries closely aligned with the United States, as they maintain supply chains and absorb tariff impacts. While product quality may be preserved, higher costs are expected to be passed on to consumers. For economies already facing weak growth, high debt, and low productivity, this could raise the risk of stagflation.
Trade diversion represents an additional challenge for economies such as the United Kingdom. In 2024, the United Kingdom’s top five exports to the United States in terms of total annual value were all high value-added manufacturing sectors — automobiles, pharmaceutical products, power generators, scientific instruments and aircraft. Firms operating in these industries are typically large multinationals, which may redirect investment to other jurisdictions to retain access to the US market. Such a shift could exacerbate deindustrialisation and reduce the domestic labour share in high-productivity sectors of the UK economy.
Smaller export-oriented economies may face pressure to adjust trade strategies, including relocating production to countries with preferential US trade terms, though such adjustments are uncertain and costly under the Trump administration. Meanwhile, retaliatory measures by major economic powers such as China and the EU could lead to strategic redirection of their import demand away from the United States, potentially benefiting countries such as Australia and New Zealand. For economies dependent on a narrow range of exports, navigating this evolving landscape will require difficult policy trade-offs between competitiveness, diversification and political wisdom.
Economic tensions between the United States and major emerging market economies have dramatically intensified, with China and the United States engaging in a series of retaliatory tariffs. As of 15 April, the US tariffs on Chinese imports ballooned to 245 per cent while China raised its duties on US imports to 125 per cent.
The economic implications of this US–China trade war on both economies are still unfolding. Broadly speaking, the trade war serves as both a demand shock and a supply shock. China is likely to experience primarily deflationary pressure as US consumer demand withers. Possibility of output and employment contraction arising from the trade war already starting to motivate Beijing to consider strong stimulative policies.
Within BRICS countries, supply chain readjustment and localisation is increasingly likely. As large consumer markets, these economies could command scale advantages of their own, by enhancing intra-group specialisation and investment, coordinating divisions of labour and reducing exposure to US trade volatility.
The long-term economic consequences of these protectionist measures are increasingly negative for the United States. The Trump administration has made clear its intention to use tariffs as a bargaining tool to secure deals that prioritise US interests. Yet it appears to underestimate the scale of global retaliation. Despite rhetoric around reshoring of production, structural challenges such as high production costs and a diminished manufacturing base make this unfeasible in the short run. A more viable strategy lies in strengthening high-skill, innovation-driven industries, leveraging tax policies, technological advantages and the strength of the US higher education system.
The US dollar will remain a global reserve currency at least for a while. Despite the negative reactions of the bond market and stock market to Trump’s trade measures, the dollar remains the dominant currency in global financial system. But it is worth noting that gradual changes are observable in many central banks, especially in Asia, in terms of portfolio diversification and scaling down of the dollar in their foreign exchange reserves.
Rising protectionism — such as Trump’s tariff policies — is making the world more fragmented. Smaller and more open economies face a bumpy road with high inflation and output volatility. For larger economies, particularly the Asian giants and the BRICS bloc, the post-adjustment phase may offer opportunities to establish alternative trade frameworks and supply chains. In this new and uncertain environment, regionalised trade systems and localised production networks are likely to be the future of global commerce.
Sambit Bhattacharyya is Head of the Department of Economics at the University of
Sussex.
Anindya S Chakrabarti is Associate Professor of Economics at the Indian
Institute of Management Ahmedabad.
Gonul Colak is Head of the Department of Accounting & Finance at the University of Sussex
Jiao Wang is Assistant Professor of Economics at the University of Sussex Business School.