Three scenarios for the course and impact of US President Donald Trump’s trade policy have been drawn up by the research and consulting firm Trust Economics.
In an analysis to its clients, it states that “if implemented, the tariffs would constitute the largest shock to trade in more than 100 years,” adding that their maintenance “would have significant consequences for the creditworthiness of both the United States and countries around the world.”
Even if Trump completely withdraws the tariffs he announced, which is unlikely, the trust of previous alliances and supply chains would not be restored, resulting in some degree of permanent economic damage.
Given the great uncertainty that exists, due to the difficulty of predicting the American president’s moves, Trust Economics has prepared three scenarios, in view of the upcoming revision of his forecasts for growth and fiscal figures.
Scenario 1. The light tariff scenario, where the announced tariffs constitute the “ceiling” and starting point for US negotiations with other countries. A combination of appeasement of the US by other countries and implementation of structural reforms to stimulate domestic demand will lead to a new equilibrium, based on a slightly greater degree of protectionism than before, but ultimately not causing too much damage to trade and capital flows.
In this scenario, America enters a technical recession – two consecutive quarters of negative GDP – but there is positive growth throughout 2025. Global uncertainty is limited.
Scenario 2. The trade war scenario in action. The announced tariffs are largely implemented and become a permanent feature of US trade policy. In response, most major economies – including the European Union and China – are taking countermeasures, resulting in a significant reduction in global demand, the redirection of supply chains and significant uncertainty in 2025, with capital flows remaining free. In this scenario, the US would be in recession for the whole of 2025 and the adverse effects on global growth and credit conditions would become more pronounced, especially for countries with closer trade ties with the US.
Scenario 3. The worst-case scenario concerns the outbreak of an economic and financial crisis. According to this, the announced tariffs are largely permanent and are met with retaliatory tariffs by most major economies, including the EU and China. This scenario also predicts that the Trump administration accelerates the path of isolationism, introducing restrictions on capital movements (capital controls). The rules-based global trading and financial system risks collapse and confidence in the US dollar, as a global safe asset, weakens significantly, leading to a major revaluation of US assets and triggering a financial crisis. A further consequence would be the entry of the US economy into a deep recession in 2025-2026. The extent of the crisis, in such a scenario, creates major credit risks for countries.
Trust Economics says the ultimate impact on growth, inflation, public debt and other indicators that determine its credit ratings will ultimately depend on the macroeconomic environment resulting from US policies, the reactions of trading partners and the underlying strengths and weaknesses of the countries before the trade shock.
