Will 2025 be the year of tariffs and trade wars?

The outlook for global economic growth in 2025 looks solid but unspectacular, with most forecasts currently hovering between 2.5% and 3%. 

But the figures mask a huge amount of uncertainty. Geopolitical escalation in Ukraine and the Middle East is a distinct possibility, impacting trade flows. The faltering of the Chinese economy - and Beijing’s reaction to it - has been one of the defining features of 2024 and could be again in 2025. Perhaps most significantly, Donald Trump begins a second term as US president in January, after a campaign dominated by ‘America first’ rhetoric.

Any of these factors could knock predictions for global growth off course. At the same time, there are also reasons for cautious optimism. In the rest of this article, we’ll try and make sense of a turbulent economic picture as the new year approaches.

The Trump effect

What will Donald Trump do next? After a convincing victory in the US presidential election and Republican majorities in both houses of Congress, that feels like the most pressing question of all. President Trump appears to have a free hand. The swift implementation of extreme campaign promises around tariffs, deportations and deregulation could have significant impacts for the global economy. But will campaign headlines translate into concrete action? 

“Trump certainly aired some extreme proposals during the campaign, but the assumption at the moment is that they will not all be implemented, and the ones that are may not be implemented fully or straight away,” says John Lorié, Chief Economist at Atradius. “For example, the 60% across the board tariff on Chinese imports does not seem realistic, despite campaign promises. The same is true of the three million deportations of undocumented immigrants.”

Trump’s hardline rhetoric could quickly bump up against hard economic reality. The business community is likely to push back against blanket tariffs that might provoke a damaging trade war, while deporting millions of workers could threaten the viability of thousands of companies. Any subsequent rise in consumer prices would go down very badly with voters. 

“He won the election comfortably but there will be some constraints on his actions,” says Lorié. “For that reason, while there is very likely to be some new tariffs, they may be targeted at specific sectors and be less impactful than the campaign headlines suggest.”

A Trump boost to trade?

Still, Trump did use tariffs and the threat of them during his first presidency and will almost certainly do so again. But the threat may be more in evidence in 2025, followed by implementation in 2026 and a gradual ratcheting up of costs.

“Paradoxically, the threat of tariffs may boost trade growth next year,” says Lorié. “Where possible, businesses will front load their imports to the second half of 2025 to beat any new duties that are expected to come into force in 2026.”

Trump’s fiscal policy may also boost trade, at least in the short term. He has promised to cut taxes for some groups and reduce the regulatory burden across the economy. These measures are likely to stimulate growth in the US economy and - in the absence of new tariffs - boost import volumes.

“That in turn will stimulate global trade,” Lorié adds. “But an overheating economy would put pressure on inflation. Core and service inflation are still relatively high in the US, and at the first sign of an increase the Fed (Federal Reserve) will act. That could mean US interest rates staying higher for longer.”

For the moment at least, the growth forecast for the US economy over the next 12 months is around 2.6%, which is near to the global average. 

The global view

Elsewhere, emerging Asia is likely to beat the global average for growth again in 2025, though the 4.4% figure forecasted for Asia and the Pacific represents a slight dip compared to this year. 

The drop off is driven by China’s faltering economy, which is also forecast to grow by around 4.4% in 2025, well below the current government target of 5%. High performing economies like India and Vietnam will take some of the strain, with expected growth of between 6% and 7%.

“It is unrealistic to expect China to see the sort of 10% - 12% growth we’ve seen in the past,” says Lorié. “One specific problem it is contending with is an ageing population. That means China is missing out on the population growth benefit that India is currently enjoying.”

Beijing has proposed a package of measures to drive growth, including lower interest rates, cheaper mortgages and extra money for local investment projects. The next few months will show if it has acted quickly and decisively enough.

More widely, a number of APAC countries are currently stuck in the “middle income trap”, which the World Bank describes as a situation where middle-income countries “face serious headwinds related to economic growth, wage competition and innovation.” China and India are both in the group of 100 plus countries caught between low and high-income status.

“The challenge is to get out of that trap, and for that you need Foreign Direct Investment (FDI), an educated workforce and sustained productivity growth,” says Lorié. “Vietnam is one country that is doing quite well in this regard, by being open to economies of both East and West.” 

The problem with Europe

Among the other economic regions, emerging (Eastern) Europe and Latin America are likely to match global averages for growth in 2025. But the real problem is Western Europe.

“Poor growth across the eurozone is dragging on forecasts for advanced economies,” says Lorié. “This is partly the result of external forces, but there are internal challenges as well. The EU needs to focus its efforts on implementing growth-enhancing reforms.” 

That might include reducing regulation, reducing the fragmentation of markets (and financial markets in particular), and promoting dynamism and innovation in the economy, he adds. Investing in scientific research and R&D should be a priority, to close the innovation gap with other economies. Labour market reforms may also be necessary. 

Most economists expect stronger activity in the eurozone next year than this, though growth will only rally to an underwhelming 1.3%. The better news is that inflation is nearing target levels, and interest rates are easing more rapidly in the EU than they are in the US.

A year of living dangerously

Economic forecasting is a tricky task at any time, and more so during a period of significant geopolitical turbulence. That has been true for the last couple of years, but the wildcard for 2025 is the American presidency.

If President Trump defies expectations and quickly applies blanket tariffs on China, Canada, Mexico and the EU, all of which he has threatened to do, all bets are off. At the moment, markets are expecting more gradual and targeted measures. The problem for economies around the world is that the mind of the new president - unconstrained by Congress or the need to fight future election campaigns - may be impossible to predict.