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On 2 April 2025, the US Administration announced a set of tariff increases, bringing the US back to levels of protectionism last seen in the Great Depression era. Subsequent events have seen many tariffs postponed, while others increased, so the situation remains fluid.

This shifting trade policy is set to have far-reaching implications for the global economy, affecting various sectors and countries differently. As businesses and policymakers navigate this new landscape, understanding the potential outcomes is crucial.

Here’s a breakdown of the key insights.

A Return to Protectionism

The newly announced tariffs are proving more severe than anticipated.

Varied Global Impact

The effects of these tariffs will not be uniform across the globe. Different countries and regions will experience varying levels of impact, with some economies more vulnerable due to their reliance on exports to the US. As nations begin to announce retaliatory measures, the landscape of global trade is poised for upheaval.

If these tariffs remain in place, we can expect a substantial downgrade in growth forecasts for both the US and the global economy. Although a recession may be avoided, world trade volumes are likely to suffer significantly, affecting economic performance through the remainder of 2025 and beyond.

• China: The tariffs represent a significant challenge for China, likely prompting a fiscal response that may not fully counteract the negative economic impacts.
• Eurozone: The Eurozone could see a reduction in GDP growth by 0.2 to 0.3 percentage points due to the new tariffs. While a full retaliation from the EU is not anticipated, targeted responses may emerge, affecting investment and economic stability.
• UK: The UK’s growth forecast has been downgraded, with expectations now below 1% for this year. The primary impact will stem from weakened US and global demand, alongside heightened trade policy uncertainty.
• Asia-Pacific: Countries like Vietnam, South Korea, and Taiwan are particularly vulnerable due to their trade dependencies. India and the Philippines, however, appear better insulated from tariff shocks.
• Latin America: While the region is largely spared from the brunt of these tariffs, the overall impact on growth forecasts cannot be overlooked. With a minimum 10% tariff applied to most countries and a generally low dependence on US exports, the effects may be limited but still significant.

Sector-Specific Consequences

The implementation of these tariffs will have sector-specific repercussions, dampening sentiment across various industries. While a global recession might be avoided, the economic fallout could still be severe, particularly for sectors heavily reliant on trade.

Practical Implications

Businesses should prepare for heightened uncertainty and potential shifts in market dynamics. Understanding the specific impacts on your sector will be vital for strategic planning and risk management.

A whirlwind of announcements and threats by the Trump administration to impose tariffs against allied and hostile countries alike has led to a downgrade in global industrial growth forecast for 2025 by 0.5 percentage points.

The President has moved swiftly to advance a trade agenda that goes beyond what was promised in the campaign and goes quite a bit further than what was assumed in a Q4 2024 industry update. This will have a major impact on global industrial prospects.

This change is not just a minor adjustment: it reflects the broader impact of global tariffs, persistent policy uncertainty, and the expectation of higher interest rates for an extended period. While not all of this downgrade can be pinned solely on the President’s trade agenda, it certainly plays a substantial role.

The impact of tariffs on US industry

The largest impacts of the tariffs will be felt in North America. The US itself is somewhat insulated from the worst effects of tariffs. Thanks to its large domestic market, it is less interconnected with its North American trade partners. However, the real challenge lies in the impact that a prolonged period of economic uncertainty will have on business investment.

Industries like energy and motor vehicles may escape the worst of the tariffs—indeed we expect the Trump administration to tariff energy at reduced rates, consistent with announcements in February and March. The largest downside impact to the US will come via heightened uncertainty, with firms holding off on investment, and via a slower interest rate loosening cycle than we had previously anticipated. This has led to the US industrial growth forecast for 2025 being cut nearly in half, from 2.1% to 1.1%.

Canada and Mexico to enter an industrial recession.

Unfortunately, the US’s neighbours to the north and south aren’t as fortunate. Canada and Mexico are heavily reliant on the US as an export market. The broad tariffs set are likely to push both countries into an industrial recession. The following is the current status quo and it’s still pretty fluid.

As of August 2025, Canada has significantly reduced its retaliatory tariffs on U.S. goods. On September 1, Canada will lift most of the 25% counter-tariffs it imposed in March on $29.8 billion worth of U.S. imports. However, tariffs remain in place for strategic sectors:

• Steel and Aluminium: 25% tariffs remain on U.S. steel and aluminium imports.
• Automobiles: Canadian tariffs on U.S. automobiles remain in effect.
• Lumber and Copper: These sectors continue to face targeted duties.

Goods covered under the USMCA (Canada’s CUSMA) are now largely tariff-free, reflecting a renewed commitment to free trade.

What tariffs does the United States currently impose on Canadian products?

The U.S. maintains a mixed tariff regime:

• Steel and Aluminium: In August, the U.S. raised tariffs on Canadian steel and aluminium to 35% for non-USMCA-compliant goods.
• Energy and Critical Minerals: A 10% tariff applies to Canadian exports in these categories.
• Autos and Lumber: These remain subject to U.S. duties, pending further negotiations.

Despite these measures, over 85% of Canada-U.S. trade is now tariff-free, and the average U.S. tariff rate on Canadian goods stands at 5.6%—the lowest among U.S. trading partners.

How has the trade war impacted Canadian purchases of U.S. goods?

Canadian imports of U.S. goods have declined notably in 2025. From January to June, total imports from the U.S. fell by approximately $2.86 billion compared to the same period in 2024—a 1.5% drop.

Are Canadians traveling to the United States less in 2025?

Yes, and dramatically so. Canadian travel to the U.S. has plummeted in 2025, with steep declines across all modes of transportation:

• Automobile Travel: Down 33% in June compared to June 2024, following a 38% drop in May.
• Air Travel: Declined 22% year-over-year in June, marking the sixth consecutive month of double-digit declines.
• Same-Day Excursions: Fell by 40.3% in May, with overnight travel down 34.3%.

European defence spending insufficient to overcome competitive challenges.

Turning to Europe, we expect the US to impose a blanket 10% tariff on all goods imported from the EU. While European export exposure to the US is relatively small compared to its North American neighbours, the tariffs add a further headwind to a region that has already endured a two-year industrial recession. Pharmaceuticals, high-tech, and machinery have the biggest dependence on the US export market.

There is expectation that European industry will begin its recovery later this year, driven primarily by a rebound in domestic demand, a normalisation of inventories, and a partial recovery for energy-intensive industries amid lower energy prices. Yet, there is considerable pessimism about European industrial competitiveness and reasoning to push back the speed and magnitude of the recovery:  expect industrial value-added growth of just 0.6% in 2025 and 2.1% in 2026.

Growth in Europe’s defence spending will provide some boost in a few targeted sectors such as aerospace and fabricated metal products. However, these are relatively small segments, and this tailwind to growth will be most strongly felt in 2027–28.

European Union Tariffs on US Goods in 2025

The U.S.–EU trade agreement established a 15% average tariff rate, successfully defusing what had become the most serious transatlantic trade dispute in recent history. This deal was the result of intense negotiations following the United States’ imposition of 25% tariffs on imported steel and aluminium in March 2025 under President Trump. In response, the European Union unveiled a €26 billion retaliatory tariff package targeting politically strategic U.S. exports. As tensions escalated, Trump further threatened a 30% blanket tariff on all EU goods, prompting the EU to prepare an expanded €100 billion ($117 billion) countermeasure. Despite this escalation, the EU delayed implementation of tariffs on €21 billion ($25 billion) worth of American goods until early August, choosing instead to pursue diplomatic channels.

External pressures mount on Chinese industry but who holds the cards?

Which economy would be hurt more if all imports and exports were cut off between the US and China?

A complete cutoff of trade between the U.S. and China would have severe consequences for both economies, but the impact would differ based on their economic structures and dependencies.

Impact on the U.S.:

• Supply Chain Disruptions: Many American industries rely on Chinese manufacturing, especially in electronics, machinery, and consumer goods. A sudden halt would lead to shortages and price increases.
• Agriculture Losses: The U.S. exports large amounts of soybeans, corn, and pork to China. Farmers would struggle to find alternative buyers.
• Technology & Semiconductor Setbacks: China is a major market for U.S. tech companies. Losing access would harm firms such as Apple, Qualcomm, and Intel.
• Economic Growth Decline: The U.S. economy could experience a 0.8% drop in GDP due to lost trade.

Impact on China:

• Export Revenue Loss: The U.S. is one of China’s largest export markets, accounting for 15% of total exports. Losing this market would be a major financial hit.
• Manufacturing Slowdown: Many Chinese factories produce goods primarily for U.S. consumers. A trade cutoff would lead to job losses and production declines.
• Foreign Investment Decline: U.S. companies invest heavily in China. A trade halt could reduce foreign capital inflows.
• GDP Impact: China's economy could see a 1.2% decline in growth, as it relies more on exports than the U.S.

Who Would Be Hurt More?

• China would likely suffer greater economic damage due to its higher dependence on exports and foreign investment. The U.S. would experience inflation and supply chain disruptions, but it has a more diversified economy and could recover faster. However, both nations would face long-term consequences, including job losses, slower growth, and global economic instability.

Who has more leverage politically- Trump or Xi Jinping?

Both Donald Trump and Xi Jinping hold significant political leverage, but in different ways.

Trump's Leverage:

• Economic Pressure: Trump is pushing for a direct call with Xi to negotiate trade terms, especially after China blocked U.S. access to critical minerals.
• Tariff Strategy: The U.S. recently lowered tariffs on Chinese imports from 145% to 30%, while China reduced its duty rate on U.S. goods from 125% to 10%. Trump sees this as a bargaining chip.
• Domestic Politics: Trump is under pressure to secure a favourable trade deal without losing political capital at home.

Xi's Leverage:

• Control Over Trade: Xi has been firm in restricting exports of rare earth minerals, which are crucial for U.S. manufacturing.
• Strategic Patience: China is signalling that it won’t rush into concessions, making Trump’s eagerness for a deal a potential disadvantage.
• Global Influence: Xi’s leadership enables China to shift its trade relationships with other nations, reducing its reliance on the U.S.

Who Has More Leverage?

Trump is eager to reset trade talks, but Xi appears to be holding firm, making negotiations difficult. While Trump has economic tools at his disposal, Xi’s long-term strategy and control over key resources give him strong leverage. The outcome will depend on how each leader plays their cards in the coming weeks.

Who is a better negotiator - Xi or Trump, and what past negotiations might offer insights?

Xi is known for long-term strategic patience, while Trump relies on high-pressure tactics. Trump himself has admitted that Xi is “extremely hard to make a deal with”, suggesting that Xi’s approach may be more effective in maintaining control over negotiations. However, Trump’s unpredictability can force quick decisions, making him a formidable negotiator in fast-moving situations.

Challenges in Reaching a New Deal

• Trump’s high-pressure tactics have led to quick agreements but often result in short-term instability.
• Xi’s long-term strategic patience enables slow but calculated negotiations, ensuring China retains control over key industries.

Tariffs are pulling the world back to protectionism, downgrading 2025 growth and upending supply chains. Impacts vary, North America hardest hit, Europe constrained, China pressured. With policy still fluid, expect weaker investment and higher uncertainty.

Next week – Xi, Putin, and Modi – “A New World order in the making?”

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