Trump Agenda Won’t Hurt Global Economy as Much Next Year as in 2026

Donald Trump won a second term in the White House by promising a bonfire of the verities—the truths that wonks in economic and foreign policy circles hold sacred. Free trade is out, protectionism is in. Worrying about the debt is out, tax cuts are in. The US security guarantee is out, do-it-yourself defense is in.

The established order Trump wants to overturn hasn’t covered itself in glory. Under President Joe Biden, inflation in the US soared close to 10%, partly as a result of overdone fiscal stimulus. Decades of free-trade orthodoxy have frayed the blue collars of US factory workers. Wars in Ukraine and Gaza have called into question Washington’s continued leadership in world affairs.

The blaze will take a while to get going, for the simple reason that any administration—even one with a working knowledge of Washington—can only move so quickly to implement its to-do list. For the year ahead, Bloomberg Economics forecasts global growth at an unremarkable 3.1%, unchanged from 2024. Inflation is set to slow to 3.4% from 6%, with readings in the US and other advanced economies drifting back to the 2% central banks have long targeted.  Still, the global economy—along with the financial markets—is going to feel some heat.

There aren’t a lot of things economists agree on. One is that trade is good.  Dashing to the free-trade barricades (now made in China), economists—including those at Bloomberg Economics—have fired their modeling artillery at Trump’s pledges of 60% tariffs on China and 20% on the rest of the world. Tariffs at those levels would be historically elevated, and so, unsurprisingly, Bloomberg Businessweek’s models predict a major blow to US gross domestic product and jump in inflation.  

In reality, and drawing on the experience of Trump’s first term, tariffs are likely to stop short of his campaign-trail pledges. They’ll likely be targeted, not across-the-board, and delivered in stages instead of all at once. For 2025 that means a modest impact on the US and China, building to a more significant hit to growth—spilling over to Mexico, Canada and other key trade partners—in 2026.

Nevertheless, something important has changed. Even in the best-case scenario, the swing from free trade to protectionism is bad news for the global economy. If Trump goes full throttle on tariffs, everything from Apple Inc.’s Asia supply chain to General Motors Co.’s made-in-Mexico autos are at risk.

Another idea most economists agree on: Big deficits are bad news.  Trump is promising to play faster and looser. He and his advisers are touting a classic supply-side recipe, with a dash of protectionism thrown in. First, cut taxes—stoking animal spirits. Second, raise tariffs—offsetting some of the lost tax revenue. Finally, slash public spending—closing the remainder of the gap.

The trouble is, tax cuts are easy to deliver; raising tariff revenue and cutting public spending are much harder. Hiking duties enough to raise significant sums risks a bigger blow to growth and hike to inflation—as well as discouraging imports and so actually reducing revenue. Elon Musk and Vivek Ramaswamy have been charged with finding $2 trillion in savings in the federal budget. It’s a tall order: The lion’s share of spending goes to defense, Social Security and Medicare, sacred cows that even Trump won’t turn into a red-meat sacrifice.

US public debt is already rising fast, climbing from 79% of GDP in 2019 to close to 100% in 2024. With Trump promising to extend tax cuts from his first term—currently set to expire in 2025—there’s a real risk it continues to race higher.

On security, allies in Europe and Asia count on the US as a guarantor of peace and stability. Trump’s “America First” instincts mean it can no longer be taken for granted.

There is, to be sure, an internal logic and an intuitive appeal to Trump’s proposals. Considered as a package aimed at reshoring the benefits of US economic dynamism (and ignoring for a moment the costs), raising tariffs, cutting taxes and forcing other countries to pay for their own defense makes sense.  There’s also the hope that voices of reason in the administration and the daily reality check from the markets will prevent policy going too far off the rails.

Still, most people in economics and diplomacy would agree that free trade, fiscal responsibility and the US security guarantee have delivered significant benefits for America and the world. Trump disagrees and promises to forge a new path. In the year ahead, we’ll find out who’s right.

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