The global economy is facing enormous pressure. The 2025-2026 period has been marked with rising economic risks. Geopolitical uncertainty and deteriorating foreign relations between the U.S. and other countries have been replaced with systemic pressure on the U.S. trading partners. In this article I will explore the consequences of trade tensions for the global supply chains, the investment climate as well as the economic effects of the trade wars for the U.S. trading partners.
Tariffs and U.S. trade policies
The new protectionist U.S. trade policies have been existing since Donald Trump’s first term as the U.S. President. But the trade wars with all of the U.S. trading partners intensified after the beginning of the renewed protectionist phase. Mexico, Canada, India, the EU but most importantly China have all faced new tariffs on their exports to the U.S. The U.S. now utilizes high tariffs, most notably on aluminum, steel, and automotive sectors as well as import restrictions and export controls to raise the U.S. GDP, most notably in the manufacturing sector. But most importantly Trump aims to raise the U.S. employment by getting the production facilities and jobs from developing countries like India and China back to the U.S. by making foreign products more expensive for American consumers.
As of the end of 2025 a large proportion of global imports were affected by tariffs. As can be seen from the diagram, the global imports worth USD 2,640 billion, or 11.1% of total imports, were affected by tariffs imposed between mid-October 2024 and mid-October 2025—more than four times the USD 611 billion just before that period.
However, tariffs only lead to fragmentation of the global economy because they badly affect all the countries involved in the trade tensions. Even though the direct effect on the U.S. GDP has been rather low, estimated at 0.7%, the U.S. trade policies have substantially raised business uncertainty and heightened market volatility, while provoking countermeasures from U.S. trading partners. Additionally, tariffs have increased costs on imported goods for both businesses and consumers, while disrupting the supply chains. Higher prices of imported goods obviously lead to higher producer and consumer inflation numbers. Moreover, U.S.-based companies, most notably exporters selling products to countries with the highest U.S. tariffs have to cut their production, while laying off American workers.
As reported by CNN, “James Bullard, former president of the Federal Reserve Bank of St. Louis,… said … there is a growing risk of a repeat of the Smoot-Hawley Act, the infamous 1930 tariff hike that worsened the Great Depression. European countries had retaliated with tariffs of their own, and U.S. imports fell 40% in the two years following Smoot-Hawley. “Who wants to invest when you don’t know what the rules are going to be?” Bullard said.””
Also, according to CNN, “Mary Lovely, senior fellow at the Peterson Institute for International Economics, said companies will struggle to invest if they don’t know how enduring tariffs are. “The uncertainty is at a level many of U.S. have never seen before,” Lovely said.” In other words, uncertainty, caused by tariffs, is particularly problematic for both investors and businesses. So, the indirect effects seem to be much more serious than the direct ones.
Apart from the fact that trade wars raise uncertainty, they deteriorate the relations between the U.S. and other countries, while damaging the reputation of the U.S. as an economic partner. At the same time, they do not fully solve the problems that President Trump aimed to solve, namely that of full employment and higher manufacturing activity.
According to Trump, “the country will be making a fortune”. He said this in April 2025 but this still did not happen. As can be seen from the diagram since 2023, the U.S. manufacturing activity level has rarely risen above 50. If the PMI indicator falls below 50, it means contraction of the economic activity levels. As concerns the U.S. unemployment rate, it has been rising steadily since 2022, totaling almost 5% now.So, it seems that higher tariffs do not help Trump achieve the U.S. aims. As the Fed’s Jerome Powell said in 2018, “”if it results in broader, higher tariffs across a broad range of traded goods or services that remain that way for a longer period of time, that will be bad for our economy and for other economies too.”
Supply chains are facing pressure
“The supply chain is the backbone of the global economy, and it requires a laser focus on both efficiency and resiliency”—Eric Riddleberger.
Due to rising geopolitical tensions and increasing protectionism, global supply chains are also getting transformed. Businesses have to shift from “just-in-time” production to holding high inventories. Moreover, companies have to look for business partners in different countries and change the delivery routes. In some cases, it has led to longer shipping routes and higher costs as a result. Also, companies have to stop relying on a single country to sell their products to. A good example of this is the “China+1” strategy. It could be defined as “a supply chain strategy that encourages companies to minimize their supply chain dependencies on China by diversifying the countries from which they source parts” and is particularly important for U.S.-based companies. Alternatively, companies try to have production facilities in different countries to mitigate risks. Good examples of this are nearshoring or friendshoring which involve moving production facilities closer to either the end market or to more friendly countries. This is done to stop relying on geopolitical rivals. Moreover, businesses have to look for different suppliers and regions to make sure they would not run out of essential materials or parts.
What do trade wars mean for investors?
As can be seen from the diagram above, in the first half of 2025 when the U.S. trade policies tightened, the S&P 500 index crashed.
Particularly concerned are investors with companies that trade with China and other countries, against which the tariffs have been announced. Also, Chinese companies’ shares listed on U.S. stock exchanges often get sold off. But even certain commodities fall in value when trade relations deteriorate. This is particularly true of oil because investors expect the global economy to shrink, thus decreasing the demand for it. Moreover, tariffs announced by the U.S. make the U.S. seem like a less stable country to invest money in.
Then, the general uncertainty makes investors choose more conservative investment strategies. It also raises the demand for safe-haven assets.
What does it mean for the European economy?
European economy
According to Christine Lagarde, the ECB’s President, Europe is facing the highest tariffs since the days of Smoot Hawley in the 1930s, imposed by the U.S., the EU’s largest “trading partner”. During Lagarde’s speech on 30 September 2025, she said that a year ago, the policy makers
“have assumed that U.S. tariffs rising from 1.5% to 13% would trigger a major adverse shock to the euro area economy. Indeed, most trade models judged the imposition of tariffs to be, on net, negative for euro area growth and likely positive for inflation, at least in the short run.”
At short, the ECB expected the following consequences of the tariff war with the U.S.:
- Retaliation from the EU authorities. As a result, EU tariffs on U.S. goods would trigger higher inflation growth.
- The authorities expected tariffs to trigger a depreciation of the euro against the dollar, which would further contribute to higher inflation.
- But the greatest fear was that of uncertainty that would suppress business investment and growth.
But these consequences were highly limited.
Retaliation has been limited. For example, in response to the U.S. tariffs on steel and aluminum, Europe imposed tariffs on €26 billion worth of American products, but canceled them after an agreement was signed in July 2025.
So, there was not much supply chain disruption. The Euro has not depreciated relative to the USD since the beginning of the trade tensions with the U.S.
Rather, the opposite has happened. Since the start of 2025 when the U.S. started imposing tariffs against its trading partners, including the EU, the EUR/USD has appreciated as can be seen from the graph on the next page.
Only the effects of uncertainty were in line with expectations. The ECB predicts that the “cumulative impact of tariffs and uncertainty on growth” would be “around 0.7 percentage points between 2025 and 2027”. Even though the effect of uncertainty is still negative, it is not as serious as many economists and policy makers have feared.
As Michael Spence, a Canadian-American economist once said, “On their own, tariff and trade barriers, if viewed as transitory negotiating tactics, will not significantly change global investment patterns or the structure of global supply chains and employment.”
Not only were the consequences of trade tensions limited due to the trade deal struck between the U.S. and the EU, it is also because the European authorities have taken measures to stimulate growth.
First, according to Lagarde, EU governments have started investing heavily in defense. So, government investment would add 0.25% to economic growth between 2025 and 2027.
In order to reduce the risks from the rising tensions with the U.S., the EU has also seeked to sign new trade agreements. For example, according to the ECB, “the Mercosur and Mexico deals now being adopted cover more than 3% of extra-euro area goods exports, while agreements currently under negotiation account for a further 6%.”
In other words, EU governments try to strengthen their trade relations with other countries to diversify risks from the trade war with the U.S.
China and India – different ways to adapt
China
Diversification, export rerouting, self-sufficiency and counter responses are all part of China’s strategy to adapt to the U.S. tariffs. China is moving away from the Western markets, selling its products to the Global South, including Southeast Asia. Beijing also actively improves ties with Europe and Russia. Regional Comprehensive Economic Partnership (RCEP) and the Belt and Road initiative are all part of Beijing’s co-operation with other countries. However, China did not completely stop trading with the U.S. But it exports its products to the U.S. via other countries, including Vietnam, Malaysia and Mexico. Also, China’s internal policies support the country’s technological progress to ensure self-sufficiency. This is especially true of AI investments, semiconductors, e-commerce, EVs and other green technologies. Apart from international trade the Chinese government also supports the domestic economy to stimulate Chinese consumers’ demand. Last but not least, China uses retaliatory tariffs to respond to the U.S. trade policies. Additionally, the country restricts exports of rare earth minerals and takes investigations against U.S. companies.
India
Unlike China, India does not take countermeasures against the U.S. Instead, it tries to reach trade deals with the U.S. and also strengthen economic ties with other trading partners. Apart from tariffs imposed by the U.S., India also has complicated relations with China due to the two countries’ clashing geopolitical and military interests that India’s Prime Minister Narendra Modi, is trying to delicately improve. While India heavily relies on Chinese goods, including electronics and textiles, New Delhi is afraid of completely opening up its markets to China due to competition concerns. Moreover, China and India have long-lasting border disputes. The conflict between the two countries centers on Aksai Chin (controlled by China, claimed by India) and Arunachal Pradesh (controlled by India, claimed by China).
As I have mentioned above, India is trying to reach compromises with the U.S. For example, last year, India reduced tariffs on 55% of U.S. exports and increased purchases of U.S. defense and energy products. At the same time, there are limits to what compromises can be reached with Trump. For example, India cannot open its markets to U.S. agricultural products because the country has suffered from farmers’ protests and not protecting them would be a political suicide for India’s government. Interestingly, U.S. trade volumes with India have increased.
Indian exports to the U.S. have risen substantially from 2024 to 2025. This is surprising, given the fact that in the beginning of 2025 the U.S. started announcing new tariffs against many countries, including India. This is due to negotiations organized by Trump and Modi. However, it was recently announced that the U.S. and India would sign a deal in March this year. According to India’s Trade Minister Piyush Goyal, “A formal agreement on this deal will take 30-45 days and will be signed in March”.
At the same time, India’s economy in general is unlikely to be severely impacted if trade tensions with the U.S. substantially intensify. In 2024 before the rising trade tensions between the U.S. and other countries, Indian exports to the U.S. only totaled 2% of the country’s GDP. According to Goldman Sachs’s estimates, even punitive 25% tariffs, levied on Indian exports for purchasing Russian oil, should have reduced Indian economic growth only by 0.3%. However, as reported by Reuters, these tariffs have recently been reduced. At the same time, as I have mentioned above, India’s government tries to find a compromise with the U.S.
Yet, India also attempts to find other trading partners, given its complicated relations with the U.S. and China. For example, the country has recently signed a free trade agreement with the UK. India’s government also continued its trade negotiations with the EU, New Zealand, Peru, and Oman. Given the fact that India is a member of the BRICS+ alliance, it negotiates trade agreements with other BRICS members, including Russia and Brazil.
How do countries deal with the global risk?
Countries, especially from the BRICS bloc are forced to get more sovereign. This trend has become especially obvious after 2022 when sanctions against Russia were imposed by the collective West. As part of these sanctions, Russia’s foreign reserves kept in Europe were frozen. Other BRICS members, therefore, decided to prevent this situation from happening to their foreign reserves. That is why they decided to increase their gold holdings stored in their home countries. China in particular is at risk due to its deteriorating relations with the U.S.
Also, the BRICS alliance is slowly moving away from the U.S. dollar as a medium of exchange. Instead, the countries are using their own national currencies to trade with each other. Moreover, the BRICS countries have also created their working prototype of the common currency.
According to Payments Journal, “the Institute for Economic Strategies of the Russian Academy of Sciences announced a working prototype of a trade currency known as the Unit, structured to be backed by 60% of BRICS national currencies and 40% by physical gold.
The national currency portion is equally weighted among the Brazilian real, Chinese yuan, Indian rupee, Russian ruble, and South African rand, representing the bloc’s five founding members.”
All this means that the U.S. dollar and therefore the U.S. are slowly losing their global dominance. So, the post-war Bretton Woods world order that started after the end of World War II is changing. As Canada’s Prime Minister Mark Carney said, “the old order is not coming back”. In other words, the world now seems to be getting multipolar, while emerging countries are fighting for influence.
Conclusion: consequences for the global economy
Despite the fact that the trade wars do not dramatically crash the GDP figures of the countries involved, the global world order is changing and we are moving closer to the world dominated by several powerful countries. The U.S. reputation has suffered greatly due to the trade wars with its adversaries and major partners. Also, the countries against which measures have been taken, adapted to the new reality without the U.S. being their main economic partner. So, it seems like the world will never be the same. But what does the new reality mean for sovereign countries and businesses? The new reality taught countries about the importance of being self-sufficient or at least having many trading partners. If the relations with one trading partner deteriorate, it would be possible to switch to others. In other words, they have to have multiple trade agreements. But it is even better to increase local production of essential goods to avoid relying on imports. Additionally, in order to manage risks from deteriorating foreign relations, it is necessary to avoid investing foreign reserves in currencies of geopolitical opponents. As concerns businesses, they also have to diversify. Under the current reality it is highly irrational to rely on one product or one sales market in one country. Moreover, businesses should have suppliers in different countries. As concerns investors, they should invest more capital into conservative high-quality assets as part of a defensive strategy.
Under my base-case scenario, in the near future it is likely that trade relations between the U.S. and other countries would keep getting worse, meaning more uncertainty for investors. However, there is a possibility that the situation would change two or more years later if Donald Trump does not get reelected as the U.S. President. It is highly unlikely, in my opinion, that the trade relations between the U.S. and its trading partners substantially improve before that under the current White House administration.
By Anna Sokolidou
Photo: Shutterstock (4)
____________________________________________________________
Further Reading
The pressures on the world economy demand not just awareness, but strategic response. At World Economic Journal, we turn macro trends into actionable insight for leaders, investors, and decision-makers.
For interviews, executive perspectives, rankings participation, and partnership opportunities:
adv@world-economic.com
Stay with us for analysis that turns economic complexity into clarity – Insights. Innovation. Impact.
