As global economic relations continue to evolve, the effects of trade policies, particularly in the United States, are becoming more pronounced. Since the onset of the Trump Administration in 2017, the US share of global trade has been steadily declining, even as its GDP growth remained strong. Despite this, the US’s share of global equity valuations has soared, reflecting investor confidence in the profitability of innovative US companies. Meanwhile, countries outside of the US have been experiencing growing trade liberalization, as nations sign new trade agreements to secure their positions in an increasingly interconnected world economy.

Will a Retreat from Global Trade Hurt the US?

As the US reconsiders its role in the global trading system, a key question arises: Could the further withdrawal of the US from international trade negatively impact its economic growth? Historically, trade has been a critical engine of growth for many economies. Exports create jobs and contribute to GDP growth, while imports stimulate competition, driving domestic producers to innovate and become more efficient. Past periods of higher tariffs and reduced trade volumes have often been accompanied by slower economic growth.

From the post-World War II era until the 2008 financial crisis, global trade experienced waves of liberalization, reducing barriers to trade such as tariffs and regulatory hurdles. These changes allowed global companies to design highly efficient supply chains, fueling growth and productivity. The trend accelerated further with China’s entry into the World Trade Organization in the early 2000s.

Shifting Trade Patterns: US Moves and Global Response

While the US’s trade policy has certainly had an impact, it’s not only the threat of tariffs that is reshaping the global trading environment. Since 2017, both the Trump and Biden administrations have led to changes in global supply chains, prompting countries to rethink their dependence on the US. The US share of global trade as a percentage of its GDP has been in decline, while trade volumes in other major economies, such as the European Union and China, have been on the rise.

As the US implemented trade restrictions and pulled out of potential trade deals with countries like the European Union and Pacific nations, other countries seized the opportunity to liberalize trade. The European Union, for example, negotiated multiple free trade agreements (FTAs), while China pursued similar agreements with countries across the globe.

Countries are now scrambling to mitigate the potential risks of relying too heavily on the US by diversifying their trade relationships. The European Union has strengthened ties with South American nations through deals with Mercosur, while also negotiating with Malaysia, Australia, and Indonesia. Meanwhile, China has been active in strengthening regional trade through the Regional Comprehensive Economic Partnership (RCEP), a trade agreement among Asia-Pacific countries.

Navigating the Uncertainty: How Global Trade is Adjusting

As governments prepare for higher tariffs and potential retaliation, many are proactively seeking to diversify trade with countries other than the US. Despite this, the US remains the world’s largest economy and the largest importer. The US market continues to be an attractive destination for global businesses, and with US economic growth projected to stay strong, its allure is unlikely to fade anytime soon.

Although no new tariffs have been implemented yet, the uncertainty surrounding potential US trade policies has already impacted global financial markets. US bond yields have risen, and the value of the US dollar has fluctuated with shifting tariff expectations. Emerging markets, in particular, are vulnerable to these currency shifts, as depreciation can fuel inflation and increase the cost of servicing foreign debt. Countries with substantial trade ties to the US, such as Mexico, are more exposed to the risks posed by potential tariffs. On the other hand, nations like India, with strong domestic markets and diversified trade relationships, are better positioned to weather these changes.

Interestingly, while much of the US government’s focus has been on trade in goods, the services sector is a rapidly growing and vital part of the economy. Services such as tourism, financial services, and IT outsourcing have benefitted from a relatively open US market. This sector remains largely unaffected by tariff-related concerns, providing a potential avenue for countries to continue trading with the US despite shifting policies in goods.

The US Economy: Growth Amid Uncertainty

Despite uncertainties around trade policy, the US economy has remained resilient. Recent data revealed that real GDP grew at a healthy 2.8% in 2024, driven by strong consumer spending, particularly in durable goods. However, business investment has seen a decline, reflecting reduced demand for equipment, such as airplanes and computers. The drop in business inventories suggests that consumer demand could accelerate imports and production in the coming months, potentially offsetting some of the trade-related challenges.

While overall GDP growth has been strong, there are concerns about the potential effects of tariffs on inflation and consumer purchasing power. In particular, increased consumer prices resulting from higher tariffs could limit household spending. At the same time, retaliatory tariffs from other countries could curb US export growth, leading to broader economic challenges.

US Federal Reserve: Patience Amid Economic Shifts

On January 29, 2025, the US Federal Reserve decided to leave interest rates unchanged, signaling confidence in the strength of the economy, while recognizing that inflation remains elevated. Fed Chair Jerome Powell noted that the labor market had cooled, and inflation was on track to ease, although he emphasized the need for caution given the uncertainties surrounding global trade and government policies. Investors reacted to the Fed’s decision with caution, reflecting broader concerns over future economic developments.

Eurozone Struggles and ECB Responses

Meanwhile, the Eurozone has experienced significant economic stagnation. In the fourth quarter of 2024, the region’s GDP remained unchanged, with several countries, including Germany and France, experiencing contractions. Spain and Portugal, however, posted growth, driven by tourism and immigration.

The European Central Bank (ECB), in response to this stagnation, recently cut interest rates in an effort to stimulate growth. ECB President Christine Lagarde acknowledged that while manufacturing in the region remains weak, services have shown resilience. However, the eurozone faces risks from global trade tensions, including the potential impact of US tariffs on the region’s exports.

Navigating an Uncertain Global Trade Future

The global trading system is entering a new phase of uncertainty, as countries adjust to the shifting trade policies of the United States. While many nations are diversifying trade relations to mitigate risks, the US remains a central player in the global economy. The next few years will be critical as governments, businesses, and markets navigate the evolving landscape of tariffs, trade agreements, and shifting economic priorities. The question remains: Will the US continue to lead the global economic charge, or will the changes in trade policy drive its economic future in a new direction?

As we move forward, understanding the delicate balance between trade liberalization and protectionist measures will be key to predicting how both global and domestic economies will evolve in the coming years.