Introduction.
The recent imposition of tariffs by the United States under President Donald Trump has triggered significant global economic consequences. While the tariffs primarily target Canada, Mexico, and China, their effects extend far beyond these nations. This report reflects on the broader implications of these policies, particularly on countries not directly subjected to tariffs, such as those in Europe and other global markets.
In February 2025, President Trump implemented substantial tariffs: 25% on imports from Canada and Mexico, and 10% on imports from China. These measures aim to address trade imbalances and protect domestic industries but have raised concerns about potential inflation and disruptions to global supply chains. The tariffs are expected to reduce U.S. GDP growth by approximately 0.25 percentage points, with potential job losses exceeding 177,000. Canada and Mexico, heavily reliant on U.S. trade, face more pronounced economic downturns, with projected GDP contractions of over 1.15 percentage points and significant employment losses.
The trading relationship between the U.S, Mexico, and Canada is the most important set of trade relations for all three countries. This relationship is underpinned by the United- States-Mexico-Canada Agreement (USMCA) which came in force on 1st July 2020. The USMCA replaced the North American Free Trade Agreement (NAFTA). Canada and Mexico have announced retaliatory tariffs, mirroring the U.S. actions, which could further exacerbate economic challenges across North America. These trade tensions may hinder efforts to develop secure supply chains and reduce reliance on China, potentially benefiting Chinese trade positions as North American economic integration faces obstacles.
What are tariffs and how do they work? A tariff is a domestic tax levied on foreign made goods, paid by the importing business to its home country’s government. The most common types of tariffs are ad valorem (according to value) which are levied as a percentage of the value of imports. To give you a perspective, a car imported into the US with a value of $100,000 is subject to a 25% tariff would face a $25,000 charge. This cost is covered by the the domestic company importing these goods. Tariffs in most cases are intended to protect the local, domestic industries by making imports more expensive thereby driving consumers to domestic producers and manufacturers. Some tariffs are put in place to protect countries from unfair trade practices by foreign countries such as subsidising a domestic industry. Anti dumping tariffs are also put in place to protect domestic producers against foreign producers inside the country selling their goods at a lower rate than they do in their (foreign) home country.
The most profound effects of increased tariffs is that more often than not, it is the consumer who ultimately pays the price. Higher tariffs subsequently lead to domestic industries increasing the price of their goods. This is particularly true for industries with smaller margin profits such as retail. The Tax Foundation estimates that tariffs on China alone will add $172 to the tax burden per U.S household. An increase in tariffs will also lead to higher unemployment rates if companies have to cover the importing costs to retain their customers and maintain their prices. This means incomes and returns to shareholders in the U.S economy are lower instead and as a result, they may have to pay their workers lower costs or consequentially fire some employees.
In the U.S employment is expected to decline by 0.11% (177,000) from the 25% tariffs and a 0.25% (400,00) rise in loss of jobs from the retaliation by other countries. Job losses in Canada and Mexico would be around 1.3% and 2.3%, respectively, and based on 2024 jobs numbers, this would amount to 278,000 Canadian jobs and 1.4 million Mexican jobs. In the event of retaliation, job loses would increase to almost 2.5% and 3.6% of total employment in Canada and Mexico, equivalent to over 510,000 Canadian jobs and 2.2 million Mexican jobs.
The current tariffs imposed by President Trump will also have an impact on inflation causing inflation in the U.S to rise by over 1.3 percentage points which could reduce to 0.8 percentage points albeit still substantial.
Global impacts.
The tariffs have also contributed to inflationary pressures worldwide. As import costs rise in the U.S., the increased prices ripple through global markets. Europe, Japan, and developing economies are likely to experience higher inflation due to rising costs of raw materials, consumer goods, and energy. The volatility of global oil prices, influenced by fluctuating demand from China, further exacerbates these inflationary pressures.
One of the most immediate effects of these tariffs is the disruption of global supply chains. Many European and Asian businesses rely on interconnected trade networks that include U.S. partners and the affected countries. The tariffs have made production more expensive, forcing companies to either absorb higher costs or pass them on to consumers. Additionally, the tariffs have encouraged businesses to shift production away from tariffed countries to regions with more favourable trade conditions. Countries such as Vietnam, India, and Turkey have seen increased investment as firms seek alternatives to China, Mexico, and Canada. However, restructuring supply chains is a complex process that requires time and financial investment, potentially slowing economic growth in the short term.
Many businesses, particularly those based in Europe, are reassessing their strategies in response to the tariffs. Companies that previously relied on the U.S. as a primary export market are exploring alternative trading partners to mitigate risks. This shift has accelerated discussions about diversifying away from the U.S. dollar in international trade, particularly among nations seeking greater economic independence. The redistribution of trade flows has created both opportunities and challenges for different countries. Nations that have positioned themselves as alternative manufacturing hubs—such as Vietnam, India, and Turkey—are benefiting from increased investment and trade. Europe, if it manages to maintain trade stability, may also emerge as an attractive destination for businesses seeking a reliable market outside of North America. Conversely, countries heavily reliant on U.S. trade, including Germany and Japan, face significant economic risks. Emerging markets that depend on American investment and financial support may also struggle as capital outflows weaken their economies.
Financial markets have responded with volatility, reflecting investor uncertainty about global trade stability. Stock markets in Europe and Asia have seen fluctuations as concerns grow over slower economic growth. Additionally, investors seeking stability have turned to the U.S. dollar, temporarily strengthening it but simultaneously reducing capital inflows to emerging economies.This shift in investment patterns has forced central banks, particularly in Europe and Asia, to reconsider their monetary policies. Some may opt for interest rate adjustments to counter inflationary risks or recessionary pressures caused by declining trade volumes.
In the long term, these tariffs may accelerate the formation of new trade alliances that bypass the traditional dominance of the U.S. dollar. The BRICS nations and other emerging economies are likely to explore alternative financial systems, reducing their dependence on Western-controlled markets. Additionally, countries may diversify their trade agreements to minimise future exposure to U.S. economic policies. If inflation continues to rise, central banks such as the European Central Bank and the Bank of England may implement stricter monetary policies, potentially slowing economic growth across Europe. These measures could further influence investment patterns and reshape global economic relations.
Conclusion.
The imposition of tariffs by the U.S. has set off a chain reaction that extends far beyond the targeted countries. While some nations have benefited from shifts in trade and investment, others face economic challenges due to inflation, financial instability, and disrupted supply chains. As the global economy adjusts, the potential for new trade blocs, de-dollarisation, and alternative financial structures is increasing. These developments will shape international relations and economic policies for years to come.