When Donald Trump takes office again, he’ll encounter a global economy vastly changed from his first term, with an even greater reliance on the U.S. than before. His plans for broad tariffs could have a larger impact worldwide than his initial “America First” policies, giving him more power in trade negotiations.
The U.S. economy has grown significantly since the pandemic, increasing its share of the global economy among G7 countries to the highest levels since the 1980s, according to the IMF. Meanwhile, China’s economic growth has slowed, Germany’s economy is contracting, and many developing countries are struggling with high debt levels.
The U.S.’s increased share in global output reflects the strength of the dollar and a rise in American productivity compared to other nations. This shift has positioned the U.S., rather than China, as the top destination for foreign direct investment, making foreign companies more dependent on the U.S. and its policies. A strong stock market has further attracted global investment. “The world’s dependence on the U.S. for demand gives more incentive for countries to find common ground with Trump,” said Brad Setser of the Council on Foreign Relations.
Starting in 2018, Trump imposed tariffs primarily targeting China but also Europe and other allies, disrupting global trade and putting pressure on export-driven economies in Asia and Europe, with minimal effect on the U.S., which relies less on foreign demand. He has promised tariffs of at least 60% on China and 10-20% across the board.
The U.S.’s economic strength has also been supported by energy independence and high government spending, according to Neil Shearing, chief economist at Capital Economics. As the U.S. now exports more energy than it imports, it benefits from rising energy prices, unlike net importers like China and Europe. America’s role as a global economic leader has solidified following the first round of Trump tariffs, the pandemic, and Russia’s invasion of Ukraine.
Europe’s economy now heavily depends on the U.S., which has become Europe’s largest export market while European exports to China have stagnated. The U.S. has also replaced Russia as Europe’s main energy supplier. This makes access to the U.S. market vital for Europe, while European markets are less critical for the U.S., giving Trump leverage in potential trade negotiations.
Germany, for instance, exports about 7% of its manufacturing value-added to the U.S. but imports only 0.8% of U.S. manufacturing value-added. “German business is vulnerable to Trump,” said Marcel Fratzscher, president of DIW Berlin.
In Asia, some countries have benefited from supply chain shifts following Trump’s initial trade policies, with manufacturers relocating to nations like Vietnam and Cambodia. For the past two quarters, Southeast Asia’s exports to the U.S. have surpassed exports to China. However, these countries are now more exposed to U.S. tariffs, which Trump’s advisors say are necessary to push manufacturing back to the U.S.
Trump’s policies, however, may trigger mixed economic effects. Tariffs could reduce imports and strain productivity, while tax cuts could drive up consumer and business spending. Other countries may retaliate with their tariffs on U.S. goods, and rising wages due to a tight U.S. labor market may lead to price increases, exposing American businesses to foreign competition.
Economists foresee a potential shift from the initial U.S.-China trade war to broader protectionist measures. “Protectionism focused on one country, like China, is manageable,” said Joerg Kraemer, chief economist at Commerzbank. “But tariffs on all countries would usher in a new era in global trade.”
