Part II
Given the highly interconnected nature of global supply chains, tariffs can disrupt established networks and force companies to look for alternative, potentially less efficient and more expensive sources of supply. This disruption can lead to production delays and further cost increases. In addition, the introduction of significant tariffs can affect exchange rates. A reduction in imports can reduce demand for foreign currencies, which can lead to an appreciation of the domestic currency. However, retaliatory tariffs and the prevailing economic uncertainties could lead to capital flight and currency depreciation, so the net effect is ambiguous.
Over time, higher import prices provide an incentive for domestic producers to increase production and encourage investment in industries that compete with imports. This reallocation of resources can lead to a shift in the structure of the domestic economy. However, such shifts may not be efficient if industries are not competitive due to tariffs, which can lead to a misallocation of resources. In addition, less competition from imports can protect domestic industries from the pressure to innovate and increase efficiency. This lack of competitive pressure can lead to slower productivity growth in the long term, which ultimately harms the economy as a whole.
Another long-term impact is the significant risk of trade tensions escalating into a full-blown trade war due to retaliatory tariffs. Such tariffs imposed by major trading partners can severely impact domestic export industries and lead to job losses and lower economic growth. The ongoing tariff increases between the United States and China, with both countries imposing tariffs of over 100% on certain goods, are an example of this risk.
In addition, persistent tariffs can impact global value chains as companies seek to circumvent tariffs by relocating production or sourcing inputs from countries not affected by the duties. This can increase costs and reduce efficiency on a global level. The overall prosperity of nations is also affected, as standard economic theory states that tariffs generally reduce overall economic prosperity. Although certain domestic industries may benefit from protection, these gains often come at the expense of consumers, other domestic industries that rely on imports, and the overall efficiency of the economy. For example, the Penn Wharton Budget Model predicts that tariffs in effect as of April 8, 2025, will reduce long-run GDP by about 6% and wages by 5%.
The empirical economic analysis indicates that the tariffs introduced in April 2025 are likely to exert a significant negative impact on the global economy. While some domestic industries may benefit in the short term from reduced import competition, these benefits are likely to be overshadowed by higher consumer prices, supply chain disruptions, retaliation by trading partners and a decline in overall economic efficiency. The magnitude of these tariffs, particularly against key trading partners such as China, Canada and Mexico, could exacerbate these negative effects and increase the risk of a global recession.
To assess the possible impact of the new U.S. tariff policy on a large global economy, it is important to consider the complex interplay between trade, production, and economic growth. The recent tariff policy disrupts the flow of goods, making exports less competitive. By increasing the cost of goods in the U.S. market, tariffs make these products less competitive and potentially reduce demand for exports. The higher the tariff, the more pronounced this effect. For example, the 145% tariff on goods of Chinese companies that goes into effect on April 9, 2025, creates a significant price disadvantage that will likely lead to a decline in export volumes. As prices rise due to the tariff imposed, the volume of goods sold to the US is likely to fall. The extent of this decline will depend on the elasticity of demand for these goods. Products for which there are readily available substitutes are expected to see a more significant decline in export volumes. Bookings for ocean containers to the US have reportedly fallen by around 60 following the announcement of tariffs, suggesting a significant decline in export activity.
The manufacturing sector is poised to encounter significant challenges, as exports have been a crucial driver of economic growth in economies that are heavily export oriented. A decline in exports resulting from tariffs may lead to reduced production, underutilized capacity, and potential job losses. Nevertheless, these impacts can be alleviated through a robust diversification of export products and markets. Presently, nearly every country imports goods from China, enhancing the resilience of the Chinese economy as it engages with global markets through quality offerings. It is clear that the United States represents the largest market for China’s automotive sector, and the loss of this market would adversely affect Chinese exports. However, the success of electric vehicles and other brands in emerging markets demonstrates the potential for innovation and market penetration in developing regions. Consequently, the new tariff policy could compel companies to diversify their exports to new countries and regions, potentially reshaping global trade dynamics.
As a result global economy could face challenges from a decline in exports, which could have a direct impact on GDP growth. The extent of this impact could be mitigated by efforts to diversify exports, depending on the overall contribution of exports to economic health. Given the heavy reliance on exports, any negative impact in this sector is likely to lead to slower growth. Nonetheless, diversification of products and markets remains crucial.
The current retaliatory tariffs are expected to have a negative impact on the economy as they lead to deadweight losses. The imposition of 125% tariffs on goods from the US is an example of this escalating dynamic of reciprocity and carries the risk of a damaging trade war that could harm economies through a decline in trade and investment. In addition, disruptions to the global supply chain can impact manufacturers dependent on imported components and raw materials. Tariffs imposed by other countries can drive up input costs, reducing profit margins or necessitating the search for alternative, possibly less efficient suppliers.
Thus, trade tensions can discourage foreign direct investment (FDI), as the uncertainty created by tariffs can deter foreign companies from investing, particularly in export-oriented sectors. This can hinder technological progress and long-term economic development. Significant tariffs are likely to hurt the global economy. These effects are reflected in reduced competitiveness and export volumes, pressure on the manufacturing sector, slower economic growth and increased trade tensions. However, in fact negative effects can be offset by the diversification of export products and markets, although the extent of these effects will depend on various factors, including the specific nature of the tariffs, the responses of the affected economies, and the broader global economic environment.
The current global landscape is undergoing significant changes that raise questions about the possible emergence of a new global order in which China will take a leading role. The unipolar dominance of the United States since the Cold War appears to be waning and giving way to multipolarity as nations such as China, Russia, India and Brazil assert their influence. The rise of groups such as BRICS+ shows that Western-dominated institutions are being challenged. Moreover, the US-led liberal international order is facing obstacles, while economic power is shifting to Asia, mainly due to China’s growth. Increasing geopolitical tensions and conflicts, such as the war in Ukraine, highlight the fragility of peace between the major powers. Rapid technological progress is also changing the global balance of power and creating new areas of competition and dependency.
China’s growing economic and military power as well as its increasing diplomatic engagement make the country an important player in shaping the future global order. As the world’s second largest economy and a major trading power, China is deeply integrated into global supply chains and is expanding its influence through initiatives such as the Belt and Road Initiative. It promotes the vision of a “Common Future Community for Humanity” and advocates a multipolar world based on sovereignty and non-interference. Although China is critical of the current global governance system, it actively participates in and leads multilateral organizations such as the Shanghai Cooperation Organization and the New Development Bank. Rapid advances in key technologies, including artificial intelligence and green energy, are further strengthening China’s global position.
In general, the US tariff policy introduced in April 2025 is expected to have a significant negative impact on the global economy, with short-term benefits for some domestic industries. Tariffs, particularly on key trading partners such as Canada and Mexico, could increase the risk of a global recession and disproportionately affect poorer households and developing countries. As the unipolar moment recedes, a multipolar order is emerging in which China is positioned as a central player with considerable economic and diplomatic influence. However, the complexity of global politics points to a future characterized by competing and cooperating powers, in which China is a leading but not necessarily the sole dominant force.
The author is a Lead Researcher at the Policy Studies Institute
Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The Ethiopian Herald
BY ALEKAW KEBEDE
THE ETHIOPIAN HERALD THURSDAY 15 MAY 2025
