At the end of March and the beginning of April 2025, President Trump’s economic policies came into sharp focus with the dramatic imposition of tariffs on imports into the United States of America. There has been some discussion about how these new tariffs were calculated and what they are intended to achieve, but they are also likely to have a major impact on the shape of the global economy in the next few years.
In general terms, tariffs are a charge on imports and paid by the buyer, and are usually aimed at raising the price of imports to make domestically produced goods more price-competitive, thereby reducing the demand for imports. While countries are already responding to President Trump’s actions, it is also possible that his tariff policy will accelerate structural changes to the global economy that were already underway.
This new shift to a more isolationist economic stance for the USA, with a focus on reviving domestic production, may well lead to a speeding up of moves towards large regional trading blocs, a growing interest in replacing the dollar as the global reserve currency, and a continuation of the trend towards localised – or at least regionalised – global supply chains.
Regional trading blocs
Regional trade blocs are hardly a new phenomenon, after all the largest neighbouring market to the UK is a trading bloc, the European Union’s single market. Like the EU’s single market, trading blocs are made up of trade agreements between neighbouring states to reduce or eliminate tariffs and other impediments to trade between them. At the end of the twentieth century, there was a wide-ranging debate about whether regional trading blocs were building blocks towards an expansion of global free trade, or whether they were ‘stumbling blocks’ undermining or contradicting it. In the end, economists concluded they were a useful way-station on the route to global free trade.
However, if the USA is moving away from a logic of free trade, then it seems likely that regional trading blocs will become the leading realms of free trade rather than merely an interim arrangement. Given the myriad agreements already in place in many regions in the world, we may see a shift of focus by governments towards maintaining and expanding these more focussed trading areas, rather than prioritising a wider global market now disrupted by the USA’s imposition of tariffs.
For many years, development economists also have argued that a key impediment to economic development on the African continent has been the difficulty and expense of intra-continental trade. While this also includes issues of infrastructure and logistics, a reduction in tariffs across African regions has nonetheless led to an expansion of sub-continental regional trade. Given that many African countries are now likely to find their exports to the USA constrained, it is possible that this will prompt an acceleration of efforts to develop a continent-wide free trade area, building on the existing regional free trade agreements among neighbouring countries.
The result of a renewed focus on regional trade and the consolidation of moves to make such trade more comprehensive may be a world economy dominated by a number of disconnected regional blocs – potentially marginalising the US market. This is not inevitable, but with Trump’s current tariff policy, a world patterned by a number of major regional trading blocs excluding the US does not look implausible over the next five years or so.
A new global reserve currency
For over half a century, the dollar has been the preferred currency for international trade, and also widely used as a ‘reserve currency’ – the currency in which reserves are kept due to its stable value. These dollars are often held as US Treasury Bonds (US Public Dept) commonly known as ‘T-Bills’. As a result, there is a massive store of US dollars held abroad. Now, the question is, as Adam Tooze poses it: ‘What if investors, both American and foreign, decide that they no longer wish to hitch their wagon to the empire of the mad king?’.
Once investors and holders of dollar reserves start to sell off T-Bills (or the currency directly) in order to replace them with securities denominated in other currencies, two things happen. First, they must choose another currency for their financial holdings. In the past, some have speculated that the euro could displace the dollar as the preferred global reserve currency. Previously, it was unclear what might trigger such a radical shift, but it seems possible that the Trump ‘tariff shock’ could be that tipping point.
Secondly, the US has long benefitted from the ‘exorbitant privilege’ of the dollar being the de-facto global currency. If there is a move away from the dollar, then the US may have to pay higher interest on its public debt (as demand for T-bills declines) and could find itself exposed to balance of payment problems previously masked by imports billed in dollars. The value of the dollar might also become more volatile if it is no longer so highly valued internationally. Both of these prospects may also stoke inflation in the USA – the very issue for which Trump’s supporters had so heavily criticised the previous Democratic administration.
The proportion of world reserves held in euros has been slowly growing since its establishment, and this may be the moment when its appeal rises sharply, positioning it as the new de-facto world currency. Other contenders – such as China’s renminbi or the Indian rupee – start from a much lower baseline than the euro, making the euro the most likely contender. Again, this is not a foregone conclusion, but would reflect an acceleration of existing trends.
The shortening of (global) supply chains
The supply chains behind many of the goods we buy often span the globe. However, over the last decade, in response to economic concerns around the effective management of extended production networks, ethical considerations about the treatment of workers in the far reaches of the supply chain, and environmental concerns about the impact of transport between production nodes, there has been a growing move to shorten supply chains. Sometimes referred to as ‘re-shoring’, this involves companies looking to bring production either back to their home country, or, at least, closer to home in neighbouring regions.
If the shift in US tariff policy prompts a shift to more regional free trade and a reduction in the use of the dollar for transactions, then the trend to bring production closer to home is likely to continue. Indeed, one of the motivations behind Trump’s raising of tariffs appears to be to ‘encourage’ US firms to re-shore production in the USA – even if many economists think that, in the short-term at least, it will be unlikely to prompt such a shift.
While it may not be clear whether Trump will succeed in bringing more manufacturing back to the USA, it seems likely that trends elsewhere will see supply chains increasingly organised within regional trading blocs.
Making America Lonely Again
While it’s not certain that President Trump’s economic policies will accelerate the changes outlined above, given that these shifts are already to some extent under way, and represent plausible responses to the particulars of the new US trade policy, the possibility of these developments speeding up in the next five years now looks more likely.
If that is the case, then the end result may be a global economy that no longer needs the USA as much as the USA needs the global market. In such a scenario, the world may move forward economically while leaving a semi-isolated USA on its margins. In some ways, this might mirror the plight of the UK in relation to the European Union after Brexit – suggesting that President Trump’s economic policies may soon become very unpopular at home.
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