From a Sneeze to a Severe Fracture: Assessing the Economic Impact

The conventional wisdom suggests that when the US economy experiences a downturn, the rest of the world feels the effects. Though,recent actions by the US administration,specifically the implementation of sweeping new tariffs,suggest a far more drastic scenario.

Instead of a minor ailment, the global economy might be facing a serious injury. as Paul Donovan, chief economist at UBS Global Wealth Management, stated to CNN, the US isn’t sneezing, the US is hacking off one of its limbs. This stark assessment underscores the potential severity of the situation.

Consider the analogy of a major earthquake. A small tremor might be absorbed, but a powerful quake can cause widespread devastation, impacting infrastructure and livelihoods across continents. Similarly, these tariffs, affecting a wide range of goods, threaten to destabilize global trade and economic stability.

The Tariffs: A Breakdown of the New economic Barriers

The new measures involve a baseline 10% tariff on all goods imported into the United States, with even higher tariffs, reaching 34% and 20%, imposed on products from major trading partners like China and the European Union. These tariffs represent a meaningful barrier to international trade, potentially disrupting established supply chains and increasing costs for businesses and consumers alike.

Recession Risk: A Looming Threat to Global Stability

The consequences of these tariffs could be dire.JPMorgan, in a recent analysis, warned that if the announced tariffs remain in place, a recession is a likely outcome for both the US and the world this year. This projection highlights the interconnectedness of the global economy and the potential for unilateral actions to have far-reaching negative consequences.

Inflationary Pressures: The Rising cost of Goods

Beyond the risk of recession,the tariffs are also expected to drive up prices within the United States. JPMorgan estimates that the tariffs will add close to 2% to the Consumer Price Index (CPI) by 2025. This increase in inflation could erode purchasing power and negatively impact household budgets.

The US has already been grappling with inflation. According to data from the Bureau of Labor Statistics, the key measure of US inflation was 2.8% higher in February compared to the previous year. The introduction of these tariffs is highly likely to exacerbate this issue, placing further strain on consumers.

JPMorgan analysts further emphasized the magnitude of the situation, stating, This year’s cumulative tariff hike should be viewed as a US tax increase of roughly $660 billion. They noted that this is the largest tax increase in recent decades by far and that the impact on inflation will be ample.

Retaliation and Global Economic Shockwaves

The economic “shock” resulting from the US tariffs is likely to be amplified by retaliatory measures from affected trading partners. the EU, the largest single market for US goods exports, has already indicated its intention to prepare countermeasures. Similarly, China has condemned the US actions as “unilateral bullying” and vowed to retaliate.

The Impact on American Consumers and Businesses

while the stated goal of the tariffs is to boost the US economy, analysts warn that they could have the opposite effect. Deep economic downturns are typically characterized by job losses, bankruptcies, and foreclosures, which stand in stark contrast to the stated ambition to “Make America Wealthy Again.”

Economists at Deutsche Bank have also noted “a meaningful increase in recession risk in the US” as a result of the tariffs. This growing consensus among economic experts underscores the potential for the tariffs to backfire and harm the very economy they are intended to protect.

Global Repercussions: Beyond US Borders

The impact of the tariffs extends far beyond the borders of the United States. A recession or slowdown in US economic growth would lead to a decrease in consumer spending, which in turn would reduce demand for foreign goods. This decline in demand could have a ripple effect, causing businesses outside the US to become more cautious about investment and hiring.

Deutsche Bank economists anticipate that unemployment will rise in the EU and the United Kingdom over the next 12-18 months as a direct consequence of the US tariffs. This projection highlights the interconnectedness of labor markets and the potential for trade policies to have a significant impact on employment levels across the globe.

Ursula von der Leyen, head of the EU’s executive arm, highlighted the new challenges faced by exporters to the US, including uncertainty, supply chain disruptions, and “burdensome” bureaucracy.She stated on Thursday that All businesses, big and small, will suffer from day one… The costs of doing business with the United States will drastically increase.

The Consumer’s Burden: Higher Prices and Reduced Choices

Consumers outside the US will primarily be affected if their governments respond to the US tariffs with retaliatory measures.Thomas Sampson, an economics professor at the London School of Economics and Political Science, explained that without retaliation, the direct impact of the US tariffs on European consumers would be relatively small. However, higher tariffs on US imports into the region would inevitably lead to price increases.

In such a scenario, European consumers will face the same sort of price increases that US consumers are facing, Sampson noted.

While the EU initially responded to earlier steel and aluminum tariffs with countermeasures on up to 26 billion euros ($29 billion) worth of American goods, including tariffs on boats, bourbon, and motorbikes, their approach this time may be more cautious. France’s finance minister indicated that the bloc is not currently considering reciprocal tariffs, as this could harm European consumers.Instead, measures under consideration are targeted at individual firms rather than entire sectors.

Antonio Fatas, an economics professor at business school INSEAD, cautioned that If there’s retaliation by the other countries, you might have similar pressure on inflation in other countries.

A Bleak Outlook: Slowing Global Growth

Despite the potential for negative consequences, some analysts believe that the global economy will narrowly avoid a recession this year. However, the overall outlook remains bleak. Oxford Economics projects that global growth could fall below 2%, which, according to Ben May, director of macroeconomic research, would be the weakest annual growth

What are the potential consequences of US tariffs on the global economy?

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