President Trump has pledged his new administration will issue sweeping tariffs to protect US industry. Well before his entry into politics proper, Trump has long complained that the US was being “ripped off” by other countries which he says benefit from selling to American consumers but block American exports from their own markets. The President’s view on the matter can be neatly summed up by a question he put to then-German Chancellor Angela Merkel during his first term; “How many Chevrolets do they drive in Munich?”

The former real estate mogul has said he is also seeking to wield tariffs as an economic weapon, both against geopolitical rivals and those who engage in unfair trade practices. President Trump has repeatedly hit out at China in particular for ‘dumping’ steel and devaluing its currency to ensure its exports can beat American-made goods. This trade imbalance has been blamed for job losses across the American economy, most acutely in the manufacturing sector, where 5.5 million jobs were lost between 2000 and 2017.

Tariffs are a key pillar of President Trump’s America First agenda. He and his team see import taxes as a way to blunt competition abroad while boosting jobs in the US, particularly in the automotive, chipmaking and steel industries. In his view, they also serve a strategic purpose, which includes expanding US semiconductor production and energy production, while denying the same to enemies, and perhaps even allies. With the world on the edge of a Fourth Industrial Revolution, access to semiconductors and large amounts of energy are more important than ever.

While the prospect of a trade war might not unnerve Trump voters, they did after all, vote for one, business leaders have raised their concerns over how new trade barriers could disrupt the global economy and reignite inflation in a big way. Experts fear that a new and aggressive American tariff regime could provoke retaliation from the likes of the EU and China, resulting in a slowdown in global trade and eventual stagflation.

Finance chief calls on Trump to think twice on tariffs

Trump has been urged to think again over his tariff plans by one financial leader, who branded the trade tax as a “blunt instrument.” Nigel Green, CEO of the deVere Group made the intervention ahead of the annual Davos meeting of business leaders and politicians, warning that a trade war “would hurt everyone.”

Mr Green, who heads up one of the world’s leading independent financial institutions acknowledged Trump’s concerns were legitimate, but said world leaders should take a collaborative approach to resolving trade disputes to protect businesses and consumers. Commenting, he said:

“Trump’s concerns about trade deficits and industrial competitiveness are understandable, but tariffs are not the answer.

“They’re a blunt instrument that punishes consumers and disrupts global markets. Davos is the place where smarter, more effective trade policies can be forged.

“Trump’s tariff strategy might resonate with domestic audiences, but the global economy doesn’t operate in a vacuum.

“These policies risk triggering a trade war that would hurt everyone—especially the middle and working classes which Trump is claiming to protect.”

Mr Green said the summit presented an opportunity for world leaders to hammer out new agreements to tackle trade imbalances and warned of the inflationary potential a new tariff schedule could bring:

“A 25 per cent tariff on Chinese imports would drive up the price of everyday items, from smartphones to clothing, directly impacting American households. Tariffs on industrial metals would increase production costs for manufacturers, slowing down production in critical sectors like automotive.

“Trump’s concerns about trade are understandable, but his proposed solutions in the form of tariffs are not. Davos 2025 must seize this moment to forge smarter trade policies that promote collaboration, innovation, and shared prosperity, rather than the divisive and damaging effects of tariffs.”

The comments came days after Trump was reportedly considering declaring a national emergency in order to activate new tariff barriers.

Trade war risks stagflation

An international trade war sparked by US tariffs could result in a toxic combination of flagging economic growth and spiralling inflation, central banks have warned. The Bank for International Settlements, which represents dozens of central banks including the European Central Bank and the Bank of England has this week raised the alarm over the impact of a looming trade war. In a January report, the BIS said:

“Global trade will probably face increased frictions and fragmentation, with implications for domestic output and prices. Although details of new trade policies are yet to be revealed, a tangible risk scenario is the broad-based imposition of trade tariffs by the United States with retaliatory measures by other countries. Estimates from a range of studies suggest that output will probably drop in the short run, while changes in consumer prices are likely to be uneven across economies.

“The inflationary effects will also heavily depend on the form of tariffs and the specific goods on which they are implemented. A key issue for central banks will be the risk of second-round effects after the initial price pass-through impact of tariffs, particularly given the potentially limited tolerance for further price increases among households.”

The International Monetary Fund has revised its world trade volume estimates downward for 2025 and 2026, as it anticipates uncertainty over trade. Its January outlook argued if countries fail to come to a consensus over trade, the spectre of stagflation looms large:

“An intensification of protectionist policies… in the form of a new wave of tariffs, could exacerbate trade tensions, lower investment, reduce market efficiency, distort trade flows, and again disrupt supply chains…

“On the upside, global economic activity may enjoy a bounce if incoming governments can renegotiate existing trade agreements and forge new deals. This could relieve uncertainty faster and be much less disruptive to growth and inflation. By boosting confidence, such cooperative outcomes could even support investment and medium-term growth prospects.”

How will other countries respond to American tariffs?  

Countries which face the prospect of being hit by new tariffs, which is virtually all of them, will have to meet the threat while courting their own various interests and interest groups. Early indications are that some countries are moving to find consensus while others are taking a belligerent approach.

EU carmakers have called on the bloc to strike a “grand bargain with the US President” to avoid a trade war. The automotive industry, which is particularly powerful in the key EU member state of Germany, wrote to European leaders this week asking them not to retaliate against any new tariffs. As The Financial Times reported:

“European carmakers have called on Brussels to strike a “grand bargain” with Donald Trump, asking lawmakers for an urgent analysis of what the incoming US president wants to avoid a bruising trade war.

“Acea, the European car industry body, on Thursday sent a letter to EU leaders urging them not to retaliate against Trump’s threatened tariffs…

“At a news conference, Ola Källenius, chief executive of Mercedes-Benz and new president of Acea, called for “a strong sense of urgency” for the EU to find room to negotiate with the incoming Trump administration.”

The intervention came after the EU indicated it could increase its purchases of US energy to help correct America’s trade deficit with the bloc, suggesting Europe’s business and political leaders could be willing to compromise if it means escaping Trump’s tariffs.

America’s biggest trade partner is its northern neighbour, Canada, where Trump’s threat of fresh tariffs has gone down like a cup of cold sick. After the US President lambasted the trading arrangements, the leader of the Canadian Conservative Party, who is likely to win the next election, said the only reason Canada has a trade surplus with the US is because it sells its energy far too cheaply – and threatened to explore refining and processing oil in Canada rather than sending it across the border.

The New York Times reports that the incumbent Liberal Party in Canada is preparing a raft of retaliatory measures which would be aimed at causing ‘maximum political pain.’ Sources close to the plans reportedly told the outlet that:

“Canadian officials are preparing a three-stage plan of retaliatory tariffs and other trade restrictions against the United States, which will be put into motion if President-elect Donald J. Trump makes good on his threat to impose a blanket 25 per cent tariff on all Canadian goods imported into the United States…

“The Canadian officials said their choice of goods was meant to be precisely targeted and aimed at political impact. They specifically want to focus on goods made in Republican or swing states, where the pain of tariffs, like pressure on jobs and the bottom lines of local businesses, would affect Trump allies.”

How the EU and Canada, as well as other crucial players like Mexico and China ultimately respond to the threat, and the reality of tariffs, remains to be seen. However, it is likely that allies and enemies alike will look for agreement before resorting to a trade war against the world’s biggest economy.

Trade tariffs risk significant disruption to the economy

The reintroduction of sweeping tariffs by President Trump, aimed at addressing trade imbalances and revitalising domestic industries, presents a multifaceted challenge to both the U.S. and global economies. Historically, tariffs have functioned as a double-edged sword. While intended to protect domestic industries, they often lead to increased costs for consumers and businesses. The Tax Foundation’s analysis shows that previous tariffs imposed during Trump’s first term amounted to a significant tax increase, affecting approximately $380 billion in trade.

The potential for a global trade war has raised fresh fears about stagflation—a scenario characterised by stagnant economic growth coupled with rising inflation. The International Monetary Fund has previously cautioned that escalating trade tensions could lower investment, disrupt supply chains, and ultimately hinder global economic growth. Moreover, the Bank for International Settlements has highlighted that increased trade frictions may lead to uneven price changes across economies, complicating the efforts of central banks to manage inflation effectively.

Critics caution that tariffs are a blunt instrument with unintended consequences. Higher import taxes are likely to raise the cost of goods for American consumers, impacting household budgets. Essential items like clothing, electronics, and vehicles could become more expensive, with inflationary pressures rippling across the economy.

For the US, the challenge lies in balancing short-term gains with long-term stability. Tariffs may provide immediate relief to struggling industries, but over-reliance on protectionism could erode the benefits of global trade and innovation. While tariffs may appeal to domestic constituencies, their broader economic impact must be carefully managed to avoid unintended harm to consumers and industries alike.