The $2.5 trillion wake-up call: How Trump’s tariffs threaten global economic order, trigger recession fears

Countries across the globe threatened retaliatory action against the United States after President Donald Trump announced sweeping new tariffs, sparking fears of a global trade war and economic slowdown. The Wednesday announcement, described by Trump as “Liberation Day,” imposed steep levies on dozens of countries, including 20% on European Union goods, 24% on Japan, and a cumulative 54% on imports from China.

The move triggered a sharp sell-off in global financial markets and drew criticism from world leaders confronting the unravelling of decades of trade liberalisation. Economists warned the tariffs would drive up prices for consumers and increase the risk of a global recession.

China’s vow to impose countermeasures further heightened concerns about a tit-for-tat escalation. Investment bank JP Morgan has also raised its estimate of the likelihood of a global recession this year from 40% to 60%, citing the scale and scope of the tariffs.

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Trump tariffs spark $2.5 trillion market meltdown

Trump’s policies triggered massive selloffs in global stock markets, as investors pulled out of shares in industries expected to be hit hardest by the new measures.

On Thursday, the S&P 500 index plunged 4.8%, wiping out $2.5 trillion in market value in its steepest one-day drop since the COVID-19 pandemic. The decline continued into Friday, with the index sliding another 5% in early trading.

Auto manufacturers were among the hardest hit following the implementation of separate 25% tariffs on car imports to the US Stellantis, which owns Chrysler, Dodge, and Jeep, announced it will suspend operations at some of its Canadian and Mexican plants.

Nissan reversed its plan to end production of its Rogue SUV in South Carolina and will no longer sell two Infiniti models manufactured in Mexico. Volkswagen said it would add an “import fee” to its vehicles brought in from Europe and Mexico to offset the tariff costs.

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Apparel companies also saw sharp declines, given their heavy reliance on imports.

Experts warn of recession

Federal Reserve Chair Jerome Powell warned that the U.S. economy is now likely to face higher inflation and slower growth than previously anticipated, following President Trump’s larger-than-expected tariff hikes.

Speaking after the announcement, Powell expressed concern that the resulting price increases, though initially one-time shocks, could lead to persistently elevated inflation. He also signalled caution in how the central bank might respond, noting the challenge of addressing inflation driven by supply-side factors, such as tariffs.

Economists now expect inflation to rise by at least 1 percentage point this year as the full slate of new tariffs takes effect. Powell emphasised the risk that inflation could stay elevated even after the initial impact of higher import prices subsides.

“No one wins from a trade war, with the US economy set to be adversely impacted as much as, if not more than, Europe,” an analyst at Barclays Bank told AFP.

A spike in inflation from the tariffs and a drop in consumption by US consumers could choke off growth in the United States and elsewhere.

More and more economists and analysts are talking about the possibility of the US economy falling into recession.

The OECD’s March forecasts already forecast a recession for Mexico this year and next. It also sharply lowered its outlook for the Canadian economy.

IMF chief Kristalina Georgieva on Thursday said new US tariffs “clearly represent a significant risk to the global outlook”.

The IMF had until now expected the global economy to expand by 3.3 percent this year and next. “It’s a major shock for the global economy,” said Antoine Bouet, head of the French economic think tank CEPII.

He expects the tariffs could shave 0.8 percent off global economic output by 2040.

Global trade fears

Early signs point to mounting concerns, especially in Asia—the world’s manufacturing hub. While China had long dominated the sector, tariffs imposed during Donald Trump’s previous presidency had already prompted some companies to shift production to countries like Vietnam, Cambodia, and Bangladesh.

Now, with Trump’s latest “Liberation Day” tariff measures, economists at Fitch warn that US tariffs have returned to levels not seen since 1909—raising the risk of a sharp economic hit.

Reflecting fears of a slowdown in trade, container shipping rates from China to the US have plunged since Thursday, signaling expectations of reduced export volumes.

The World Trade Organization said Thursday it estimated that the Trump tariffs would cut global trade by around one percent. But it said things could get worse if a tit-for-tat trade war began, and on Friday China announced retaliatory tariffs on US goods of 34 percent.

An end of free trade or a containable risk?

The “Liberation Day” tariffs took the average US tariff rate from 4.99 percent to 27.17 percent, CEPII calculated.

The measures are a fresh bump for the global economy that has faced shocks in recent years from the Covid-19 pandemic and the Russian invasion of Ukraine. But former WTO chief Pascal Lamy sought to put the situation into context.

“Thirteen percent of global imports are affected by Trump’s follies,” he told AFP.

“There’s no reason the other 87 percent become contaminated.” He said that he expects if the US economy closes up other countries would open theirs.

Numerous nations have sought recently to breathe new life into trade deal talks in the hopes of compensating for lost business in the United States.

Japan, South Korea and China called Sunday for their negotiations for a comprehensive trilateral free-trade agreement to be speeded up, and agreed to create “a predictable trade and investment environment”.

With inputs from agencies