Feature: A World Turned Inside Out | By Stephen S. Roach | The world’s major growth engines are about to run in reverse. The policies and uncertainties of US President Donald Trump’s second administration have hit a sluggish global economy with a transformational exogenous shock. Risks are especially worrisome in both the United States and China, which have collectively accounted for a little more than 40% of cumulative global GDP growth since 2010.
America is now the problem, not the solution. Long the anchor of the rules-based international order, the US has turned protectionist, posing major risks to an already fragile global trade cycle. At the same time, Trump’s MAGA (“Make America Great Again”) movement has driven a powerful wedge between the US and Europe and divided North America, with Canada’s very independence in Trump’s crosshairs. The central role of the US in sustaining post-World War II geostrategic stability has been shattered.
The US will be unable to put the genie back in the bottle. Trump’s shocking actions have eroded the trust that has underpinned America’s global leadership, and the damage will be evident long after Trump has left the scene. Having once abdicated its moral authority as the anchor of the free world, who is to say it can’t happen again?
This breakdown in trust will cast a long and lasting shadow over economic performance, not least in the US itself, where it is affecting business decision-making, especially the costly long-term commitments associated with hiring and capital spending. Businesses need to scale their future operations relative to confident expectations of future growth trajectories – now an increasingly uncertain proposition. Asset values and consumer confidence, too, have been shaken. Uncertainty, the enemy of decision-making, is likely to freeze the most dynamic segments of the US economy.
For China, state-directed policy guidance might temper the initial blow of a Trump policy shock. But the pressures of Trump’s tariff escalation will undermine China’s export-led growth model, which is especially problematic for economic growth, given the lingering weakness of China’s domestic demand.
The country’s long-promised consumer-led rebalancing of the economy remains more of a slogan than an actual shift in the sources of Chinese growth – especially with a deficient social safety net that continues to encourage fear-driven precautionary saving. China’s just-announced 30-point action plan to boost household demand draws much-needed attention to the seemingly chronic plight of the Chinese consumer. But it offers only modest support to an inadequate social safety net.
The Trump shock is likely not only to exacerbate the Sino-American conflict but also to weaken both countries’ growth prospects significantly. Don’t count on other economies filling this void. Eventually, India might be able to take up some of the slack. But its relatively small share of world GDP – currently 8.5% (in purchasing-power-parity terms), compared to 34% for China and the US combined – means that that day is in the distant future.
The same is true of Europe. While the European Union’s 14% share of world GDP is nearly double that of India, Europe remains saddled with anemic growth, compounded by mounting trade pressures associated with an escalating global tariff war.
If the apparent breakdown of the transatlantic alliance has a silver lining, it is that the incentives for strategic cohesion should have an outsize impact on European defense spending. But that will also take time. Meanwhile, Europe will equally be exposed to the adverse effects on business and consumer expectations and decision-making, comparable to those afflicting the US.
What does all this mean for global economic prospects in the coming years? The current baseline expectation of around 3.3% world GDP growth for 2025-26, as per recent forecasts by the International Monetary Fund, is far too sanguine. While there may be some front-loading of growth momentum in the early part of this year – exemplified by accelerated shipments of Chinese exports ahead of Trump’s tariff hikes – I suspect that the downside risks will progressively build.
That points to a fractional reduction of forecasts for global economic growth for 2025, with the slowdown becoming considerably more pronounced in 2026 and after. That could easily push an increasingly fragile world economy down to the 2.5% growth threshold, typically associated with outright global recession.
Nor is this likely to be a standard shortfall of global growth. To the extent that the tariff war is aimed at promoting friendshoring and strengthening supply-chain resilience, the global economy’s supply side is likely to come under significant strain. A new layer of adjustment costs is being imposed on a once-globalized world. Reshoring to higher-cost local producers not only takes considerable time but also erodes the efficiencies of production, assembly, and delivery that have underpinned worldwide disinflation over the past three decades.
Nearly five years ago, in the depths of the COVID-19 shock, I warned that the onset of stagflation was only “a broken supply chain away.” Subsequent experience and research have borne that out, confirming that the supply-chain disruptions during the pandemic and its immediate aftermath generated significant upward pressure on prices.
A global trade conflict implies a similar dynamic. The higher costs associated with Trump’s coming “reciprocal” escalation of multilateral tariffs, which are due to be announced on April 2, are especially problematic. In the face of a likely shortfall of economic growth, the added cost and price pressures are likely to tip the scales toward a global stagflation.
The Trump shock, in short, is the functional equivalent of a full-blown crisis. It is likely to have a lasting impact on the US and Chinese economies, and the contagion is almost certain to spread throughout the world through cross-border trade and capital flows. Perhaps most importantly, this is a geostrategic crisis, reflecting a reversal of America’s global leadership role. In the space of little more than two months, Trump has turned the world inside out. If my assessment of this shock is anywhere close to the mark, concerns over the global economic forecast seem almost trivial.
Feature: A World Turned Inside Out | About the author: Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China (Yale University Press, 2014) and Accidental Conflict: America, China, and the Clash of False Narratives (Yale University Press, 2022).
Feature: A World Turned Inside Out | Copyright: Project Syndicate, 2025. www.project-syndicate.org | Feature: A World Turned Inside Out
