Trump’s tariffs create global trade war risk – what now?

The global economy, still contending with inflationary pressures and geopolitical instability, now faces its most seismic shift since the 2008 financial crisis.

Pic via Getty Images

Donald Trump’s first address of his second presidency to Congress on Tuesday was a moment of reckoning.

The president took the stage with his trademark bravado, but beneath the rhetoric of national resurgence, the message was clear: America is not just flirting with a trade war – it is plunging headfirst into one.

His sweeping tariffs, particularly those targeting Canada and Mexico, have already rattled markets. The global economy, still contending with inflationary pressures and geopolitical instability, now faces its most seismic shift since the 2008 financial crisis.

Investors, businesses and policymakers must now confront a new reality – one that could reshape the financial landscape for years to come.

Trump claims his trade policies are about strengthening America. He insists that tariffs are not merely protective measures but the backbone of economic renewal.

“Making America rich again” is the slogan he champions, but the reality is far less reassuring.

History teaches us that aggressive protectionism does not lead to economic invincibility – it leads to stagnation, supply chain disruptions and higher costs for consumers and businesses alike.

The initial market reaction was swift and brutal. Equity markets tumbled and major indices posted steep declines as investors digested the sheer scale of Trump’s tariff blitz.

Companies reliant on global supply chains, from manufacturing giants to tech firms, are now staring down the barrel of higher costs and dwindling competitiveness. The fallout is just beginning, and as retaliatory measures come into play, the true cost of this economic gamble will become apparent.

Trump doubled down in his speech, arguing that foreign nations have long taken advantage of the US through unfair trade practices.

He pointed the finger at China, South Korea, and a host of other nations, citing tariffs that, in his words, are “tremendously higher” than what the US imposes on them. But this reasoning ignores a crucial economic truth: tariffs are not paid by foreign governments. They’re paid by businesses and consumers.

A tariff is, in essence, a tax. And these taxes will reverberate through every sector of the economy, from industrial manufacturing to everyday household goods.

The effects won’t be confined to American borders. We are on the verge of a full-scale trade war, and the global implications are enormous.

Emerging markets, already struggling under the weight of rising interest rates and shifting capital flows, are particularly exposed. As capital retreats from uncertainty, the ripple effects will hit everything from commodity markets to investment portfolios. The stronger dollar, fuelled by safe-haven demand, will only add to the pressures faced by these economies.

Central banks, still navigating the aftershocks of pandemic stimulus and inflationary cycles, now find themselves with limited tools to counteract the storm that’s brewing.

Monetary policy alone cannot offset the disruption of a trade war, and the potential for stagflation – slowing growth coupled with rising prices – is becoming an increasingly serious risk.

Trump has framed this as a necessary fight for economic sovereignty. But sovereignty at what cost?

American businesses, already squeezed by labuor market tightness and high borrowing costs, will be forced to absorb these new burdens or pass them onto consumers. Either way, the result is economic pain. And despite assurances from the White House, the idea that this will somehow lead to renewed prosperity is not only misleading – it is dangerous.

Investors need to prepare for heightened volatility. Corporations will need to reassess global supply chains and mitigate risks in an increasingly fragmented trade environment. Policymakers outside the US must consider their own countermeasures, balancing retaliation with economic self-interest.

The lessons of history are clear. Trade wars do not create wealth; they destroy it. Protectionist policies do not breed strength; they breed isolation. The world is now entering a period of profound economic uncertainty, and the ramifications will extend far beyond America’s borders.

Buckle up. The era of free trade, as we knew it, is under siege. And the consequences will be felt in every corner of the global economy.

The views, information, or opinions expressed in the interviews in this article are solely those of the author and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial advice contained in this article.

Nigel Green, is the group CEO and founder of deVere Group, an independent global financial consultancy.

Originally published as Trump’s tariffs create global trade war risk – what now?