Some short-term consequences are already unavoidable. Some areas of the US will face shortages of imported goods, especially from Asian countries. More broadly, aggregate demand is likely to be depressed, as virtually every economic actor — including firms, investors, and households — takes a “wait-and-see” approach to investment and consumption. Welcome as it is, the China-US agreement to suspend prohibitive tariffs for 90 days does not fully resolve the uncertainty.
But Trump’s tariffs do not necessarily spell immediate disaster for the US. After all, the US economy is not particularly exposed to trade: including services, imports amount to only about 14% of GDP, and exports slightly over 11%. Moreover, the Trump administration’s deregulation agenda, if pursued effectively, could spur growth by unlocking a wave of domestic investment in a wide range of sectors, as well as infrastructure.
The rest of the world, too, might be able to avoid the worst effects of Trump’s tariffs in the short term. At 25% of global GDP, America’s economy is large enough to cause widespread disruptions, with some countries and regions more vulnerable than others. However, as long as other countries, which account for three-quarters of the global economy, continue to trade freely with one another while potentially wielding retaliatory tariffs against the US, the damage can be largely contained.
The International Monetary Fund (IMF) echoes this assessment, predicting that Trump’s tariffs will have the largest impact on US growth (–0.9%), followed by Canada and China (–0.6%), and then Japan (–0.5%). The IMF also predicts a 0.5% loss for the UK, but this does not account for the newly announced US-UK framework trade agreement. Finally, the major economies of continental Europe are expected to face losses of 0.3% or less. Not ideal, but not fatal.
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The longer-term effects of Trump’s tariff policy are probably larger and more predictable. Whatever its flaws, the US was regarded for decades as a reliable global actor, whether in trade, finance, foreign policy, or security. No more. With political leaders, policymakers, and businesses now convinced that the US cannot be counted on, they are updating their strategies for resilience and security.
Europe is already increasing its defence spending sharply in response to the Trump administration’s evident indifference to the security of long-standing US allies. Many economies will also diversify trade away from the US. For example, as Canada negotiates revisions to the US-Mexico-Canada Agreement, which Trump hailed as a great victory of his first term, but now wants to modify, it will also seek to broaden its trade and investment linkages and reduce internal barriers to trade. Such diversification efforts will fundamentally alter the global economy’s structure.
Long-term stability at risk
The long-term stability of the US economy and financial system is also at risk, as the Trump administration weakens the institutional underpinnings of these systems. These include a commitment to capital-account openness and price and fiscal stability; a US Federal Reserve that is not subject to short-term political pressures; and a legal and regulatory system that applies rules and adjudicates disputes fairly for both foreign and domestic actors. If this trend continues, foreign investment flows may be diverted away from the US, precisely the opposite of Trump’s stated goal.
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In yet another potential blow to America’s long-term prospects, top scientific and technological talent may be motivated to leave, owing to the Trump administration’s defunding of basic and applied research in science and technology as part of its tense relations with universities over what it perceives as left-wing bias. While comprehensive data on an emerging “brain drain” is not yet available, anecdotal evidence suggests that a growing number of researchers are sending their resumes to Europe and Asia. European Commission President Ursula von der Leyen issued an explicit invitation to researchers to make Europe their home.
Yet another area where the Trump administration’s policies will have long-term effects is global governance. To be sure, multilateral institutions and frameworks were in need of a much-needed revamp long before Trump entered the political scene. However, whereas Trump might be inclined to scrap them altogether in favour of bilateral dealmaking, leaders of the other developed economies, as well as virtually all emerging economies, remain committed to a practical and adaptable version of multilateral engagement, at least in principle.
This means that efforts to build a new, more complex multilateralism, which addresses sustainability, digital trade, and trade in services, as well as the intersection between economic policy and national security, will continue, albeit with limited input from the US. Instead, the EU and the major emerging economies, especially China, will lead the way. Given Asian economies’ dependence on trade with China, such co-sponsorship is essential to prevent the global trading system from fracturing into largely regional blocs.
America’s prominent role in Asian security arrangements will complicate this process. But it will not prevent the multilateral system from evolving, or US influence from declining. This loss of influence will persist, even if the US later decides to return to the fold.
As the Trump administration sows confusion and uncertainty, it is understandable that short-term disruptions attract a lot of attention. But the longer-term effects of some of the Trump administration’s policies are likely to be more significant and far-reaching, and they will probably be only partly reversible. — © Project Syndicate, 2025
Michael Spence, a Nobel laureate in economics, is Emeritus Professor of Economics and a former dean of the Graduate School of Business at Stanford University and a co-author (with Mohamed A. El-Erian, Gordon Brown, and Reid Lidow) of Permacrisis: A Plan to Fix a Fractured World (Simon & Schuster, 2023)
