Trade wars reloaded: Trump’s tariffs poised to shake global markets in 2025

With Donald Trump back in the White House, global markets are bracing for a familiar storm with a fresh twist. The return of 'MAGA momentum' promises a heady mix of protectionist trade policies, hard-nosed tariffs, and geopolitical muscle-flexing that could rattle economies from Beijing to Berlin.

Cedric Chehab, Chief Economist at BMI, described it best: "We’re going to see more forceful efforts to protect US economic interests, often at the expense of global trade stability." The stage is set for a year where global growth hangs in the balance, and every tariff hike could send shockwaves through markets and inflation forecasts alike.

Trade and Tariffs: Trump’s Return Sparks Global Concerns

Trump’s trade agenda is expected to be a major driver of global economic risk in 2025. Key policy levers include new tariffs, heightened geopolitical risks, and demands for increased defence spending from allies. Countries like China, Mexico, Vietnam, and Germany, which run large trade surpluses with the US, are at heightened risk of facing tariff hikes.

According to Cedric Chehab, "The return of 'MAGA momentum' in Trump’s cabinet appointments signals a more aggressive stance on trade and tariffs, which could have significant ripple effects for the global economy." This change in approach raises the risk of higher tariffs on key trading partners, with the potential for sustained inflation, financial market volatility, and higher interest rates.

Chehab explained that while a 3 to 5 percent tariff increase may be manageable, higher rates could have a far more pronounced impact. "If we see blanket tariffs of 10 percent or more, combined with individual tariffs on major trade partners like China, Germany, and Mexico, the average tariff rate could climb to 12 percent or higher, which would be much more difficult for global economies to digest," he said.

US Economic Outlook: Policy and Trade Under Scrutiny

The US economy is forecast to slow from 2.7 percent in 2024 to 1.9 percent in 2025. Chehab highlighted the risk of "front-loading" of activity ahead of new tariffs, which could cause a dip in early 2025. While private consumption remains robust, supported by strong household balance sheets and lower inflation, growth is expected to decelerate. Interest rate cuts by the Federal Reserve may ease pressure, but small business financing costs remain high.

Trump’s policy agenda includes tax cuts, increased energy production, and expanded defence spending. While some of these measures may support investment and consumption, they could also contribute to inflationary pressures. "We’re likely to see a reassertion of MAGA-style politics," said Chehab. "This means we’re going to see more forceful efforts to protect US economic interests, often at the expense of global trade stability."

Geopolitical Risks and Defence Spending

Geopolitical risks are set to remain elevated, with the US likely to pressure Iran, China, and Ukraine. Trump’s push for NATO allies to increase defence spending could also lead to higher fiscal deficits in countries like Japan, South Korea, and Germany.

In the Middle East, the ceasefire between Israel and Hezbollah, as well as the potential for a truce with Hamas, could bring short-term stability. However, the broader regional landscape remains uncertain, especially following the fall of Syria’s Assad regime, which impacts Iran’s influence in the region.

Impact on Global Markets: Ripple Effects of US Tariffs

The impact of tariffs on inflation could be significant, especially if they are broad-based. Chehab noted, "A 3 to 5 percent tariff hike may be absorbed through currency adjustments and minor shifts in consumer prices, but anything higher would put substantial upward pressure on inflation." Higher inflation could force central banks to reconsider their monetary policies, potentially delaying rate cuts in key economies.

The risks of inflationary shocks are further compounded by financial market volatility.

"Equity markets are already quite frothy, and if inflation rises unexpectedly, we could see corrections," Chehab stated. He also warned that the impact of tariffs could lead to a stronger US dollar, further weighing on export competitiveness for other nations.

China and Eurozone: Trading Partners in the Crosshairs

China’s growth is forecast to decelerate from 4.8 percent in 2024 to 4.5 percent in 2025. The country's economic struggles are attributed to structural factors such as high debt levels, demographic shifts, and a less favourable trade environment. Trump’s potential tariff increases could exacerbate these challenges. "If Trump targets China with high tariffs, it’s unlikely the yuan will be allowed to devalue substantially," said Chehab, "since Beijing will want to avoid financial instability."

The Eurozone’s growth is projected to improve from 0.8 percent in 2024 to 1.4 percent in 2025, but risks remain. Germany’s industrial and export sectors face persistent headwinds from energy costs and competition from China. The region’s legislative elections in early 2025 could lead to more policy uncertainty.

Key Risks and Milestones for 2025

The year ahead is fraught with potential risks, with US political uncertainty taking centre stage. Trump's return to the White House introduces the possibility of volatile trade policies, which could send shockwaves through global markets. Geopolitical risks are also on the rise, particularly with heightened tensions involving Iran and the potential for escalation in the Taiwan Strait. Market volatility is expected to be another key concern, as frothy equity markets could experience sharp corrections if inflation surprises to the upside. Labour market weakness in major economies poses additional risks, as rising unemployment could weigh on consumption and hinder economic growth. On the fiscal front, countries facing pressure to increase defence spending may see larger deficits, complicating fiscal consolidation efforts and adding to financial instability.

Conclusion

The global economy faces a complex set of challenges in 2025, with Trump’s trade policies playing a pivotal role in shaping the outlook. The potential for higher tariffs, geopolitical pressures, and financial market volatility create an unpredictable environment. Chehab’s analysis highlights the need for businesses and policymakers to remain agile. "The interplay between Trump’s policy agenda, monetary easing, and inflation risks will shape the path forward. While the outlook for growth remains stable, the underlying risks could alter the trajectory," Chehab concluded.