Trump Tariffs Drag Global Economy, Companies Lower Targets

The tariff policies implemented by Donald Trump have become a significant obstacle to the smooth operation of the global economy, a system that has relied on predictable and relatively free trade for decades. This has led to a cascade of adjustments from multinational corporations to small e-commerce businesses, who have been forced to lower sales targets, warn of potential layoffs, and reassess their business plans. Concurrently, major economies have revised their growth forecasts downward in response to gloomy economic data.

Despite financial markets betting on Trump's potential withdrawal of some tariffs through negotiations, the high level of uncertainty surrounding the outcome has itself become a major drag on the economy. Isabelle Mateosy Lago, chief economist at a prominent financial institution, noted that the U.S. tariff policy represents a significant negative shock to the global economy, with the final tax rate potentially higher and more prolonged than anticipated. Currently, the base tariff rate in the U.S. stands at 10%, with additional industry-specific tariffs on products such as steel, aluminum, and automobiles.

The Trump administration has hinted at impending agreements with countries like India and South Korea to avert further tariffs in the coming weeks. However, during this period, companies like Swedish electronics manufacturer Electrolux have lowered their performance outlook, while Volvo Cars, computer peripherals manufacturer Logitech, and beverage giant Diageo have abandoned their set targets due to the uncertainty. Cindy Allen, CEO of a global trade consulting firm, acknowledged the strain on businesses and customers, stating that many small and medium-sized enterprises have chosen to exit the market entirely due to the sudden jump in tariff rates.

The prospect of tariffs has prompted the Bank of Japan to lower its growth forecast, with similar adjustments made by the Netherlands and the Middle East and North Africa regions due to escalating trade tensions. While official activity indicators in major economies have not fully reflected the pessimistic sentiment, the global manufacturing Purchasing Managers' Index (PMI) has shown signs of strain. Recent data indicates that British factory exports have experienced their sharpest decline in nearly five years.

Economists have warned that the temporary strength in Germany's export-oriented data may be due to companies rushing shipments to avoid tariffs. Cyrus de la Rubia, chief economist at a major commercial bank, cautioned that this could lead to a backlash in the coming months. Conversely, India's manufacturing growth hit a 10-month high in April, partly due to the same pre-emptive shipping strategy. Shilan Shah, an emerging markets economist, suggested that India could become a significant supplier of U.S. goods in the short term.

Most economists view Trump's tariff strategy as a demand shock to the global economy, weakening economic activity in other regions by increasing import costs for U.S. businesses and consumers. A potential silver lining is that this could alleviate inflationary pressures, giving central banks more room to cut interest rates. The Bank of England, for instance, is expected to take action this week. However, the real question remains whether Trump's efforts to reshape the trade system will force other economies to reform, such as eliminating single-market barriers within the Eurozone.