Posthaste: Trump’s tariff war threatens to expose cracks in the global economy

Economists fear a resurgence of protectionism from the United States could exacerbate existing vulnerabilities within the global economy. Photo by Getty Images

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When U.S. President Donald Trump unveiled his barrage of tariffs in the Rose Garden on April 2 leaders around the world feared they were watching the death blow to globalization.

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“‘Liberation Day’ was not liberating, but seems to have marked the end of global free trade,” Isabel Schnabel, a member of the European Central Bank executive board, told a gathering of business leaders in Italy a few days later.

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On that day in April, the United States imposed a 10 per cent base tax on most products coming into the country along with steep reciprocal tariffs in response to trade barriers faced by U.S. exporters abroad. The former came into effect April 5, while the latter was later postponed for 90 days after a very negative reaction from stock and bond markets.

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Even if restrictions are rolled back “the reality is that the age of free trade is unlikely to come back,” said Eswar Prasad, a Cornell University professor writing for Foreign Affairs magazine after April 2.

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“Instead, any haggling between Trump and other states will share an emerging economic system defined by protectionism, tensions and transactions.”

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This resurgence of protectionism could also exacerbate existing vulnerabilities within the global economy, economists warn.

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“The rise of protectionism threatens to bring other underlying problems in the global economy to the surface,” said Jocelyn Paquet, National Bank economist.

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The less open international trading system is likely to weigh on growth everywhere, said Paquet.

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Many countries, still recovering from the impact of the global pandemic, are already carrying higher deficits and public finances are bound to deteriorate further as growth slows. Government revenues will fall, while countries are forced to spend more supporting businesses and citizens.

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“Higher deficits will lead to increased debt issuance, which could prove problematic in the current environment,” said Paquet.

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The amount of sovereign bonds issued by rich countries hit a historic high in 2024, and any increase in the supply is likely to lead to higher interest rates, she said.

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Central banks have reduced their purchases of these bonds and are unlikely to pick up the pace if tariffs keep inflation above their targets, even if an economy is struggling.

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Foreign buyers of sovereign debt could also become more cautious, said Paquet. Buyers tend to “recycle” their export earnings in foreign currencies into foreign debt. If tariffs reduce these exports, it could cut demand for bonds.

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That leaves financial institutions and households to pick up the slack. While they may be willing to do this, National expects they will demand higher interest rates if they believe protectionism will keep inflation above central bank targets.