What a Year of Trump 2.0 Has Taught Us About the Global Economy
•February 6, 2026
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Why It Matters
The policy reshapes the U.S. trade environment, raising costs for businesses and households while decoupling growth from job creation, a warning for policymakers worldwide. It signals that aggressive tariff strategies can generate short‑term market gains but long‑term macroeconomic instability.
Key Takeaways
- •Tariffs rose to ~18% average, highest since 1930s
- •Trade deficit widened despite consumer spending resilience
- •Fed cut rates three times while inflation stayed above 2%
- •Partial tariff reversals eased pressure on auto and tech sectors
- •Unemployment rose above 4.6%, signaling jobless growth
Pulse Analysis
The resurgence of protectionist tariffs under the Trump administration marks a stark departure from the post‑World War II liberal trade order. By lifting average import duties to roughly 18%, the United States re‑created a tariff environment not seen since the 1930s, forcing multinational supply chains to absorb higher costs or delay price pass‑through. Global manufacturers, already grappling with logistics bottlenecks, faced amplified input‑price pressures, which filtered into consumer goods and heightened inflationary risks across advanced economies.
Domestically, the tariff surge coincided with a paradoxical economic picture. Strong consumer spending and a surge in AI‑related capital expenditures buoyed equity markets, delivering double‑digit gains for the S&P 500 and Nasdaq by year‑end. Yet the same policies widened the trade deficit, strained profit margins, and pushed the Fed to prioritize employment over price stability, resulting in three rate cuts in 2025 despite inflation lingering near 2.8%. Meanwhile, the labor market softened, with the headline unemployment rate climbing above 4.6% and the broader U‑6 measure nearing 8.7%, indicating a growing disconnect between GDP growth and job creation.
Looking ahead, the United States faces a precarious balance. Partial tariff rollbacks on coffee, automotive parts, and electronics have mitigated some inflationary pressure, but the underlying trade‑policy uncertainty remains. With the temporary truce with China set to expire and renegotiations looming for NAFTA‑style agreements, firms must prepare for renewed cost volatility. Policymakers will need to weigh the short‑term political appeal of tariffs against the long‑term risk of a jobless expansion, ensuring that future trade frameworks support both competitive pricing and sustainable employment growth.
What a year of Trump 2.0 has taught us about the global economy
In the months following his re-election, US President Donald Trump repeatedly claimed that trade wars were easy to win. Since his return to the White House, he has aggressively pursued tariffs, which he viewed not only as "the most beautiful word" but also as an all-purpose tool to reduce US trade and current-account deficits, boost inbound foreign direct investment, and revive the declining US manufacturing base. In so doing, he overturned decades of US trade policy to advance his "America First" agenda, a move that defined the international operating environment in 2025 and will continue to shape the global trade and economic outlook in 2026.
Almost a year into his second term, Trump's policy changes - which increased the average effective tariff on US imports from less than 3% in 2024 to around 18% (based on the latest Yale Budget Lab estimates) levels not seen since the 1930s Great Depression - have hardly been a boon for the US economy.
Instead, the trade deficit widened after Trump raised tariffs on US imports in April. Signs of an economic slowdown emerged, prompting the Federal Reserve to prioritise maximum employment and growth over price stability, resulting in three rate cuts in 2025 even as inflation remained stubbornly above its 2% target for 55 consecutive months.
Trade war woes
It was never clear how any country could emerge unscathed from extremely aggressive and indiscriminate tariffs in today's deeply globalised environment. Highly intertwined global supply chains amplify the inflationary effects of tariffs and compound the contractionary effects of inherent global demand deceleration, undermining competitiveness and growth. Such boomerang effects and inherent risks should have been expected. Indeed, they are likely to have an outsized impact on a highly integrated global economy such as the US, where consumer spending is the strongest economic driver, accounting for around 70% of US economic activity.
The Trump administration is taking comfort in the US economy's apparent resilience amid exorbitant tariffs, defying the doom-and-gloom predictions made by most economists and analysts. US growth rebounded after the Q1 contraction, boosted by strong consumer spending and private investment, especially AI-related capital expenditures. The stock market entered a tailspin in response to Trump's 'Liberation Day' turmoil, but quickly recovered. By year's end, all major US stock indices recorded double-digit percentage gains, largely powered by AI mania. The S&P 500 was up around 16%, and the Nasdaq composite index was up more than 20%.
In part, the resilience of the US economy reflects that it did not suffer the full, immediate, and severe blow of the announced high tariffs. As a starting point, tariffs were partially absorbed by US firms, with many importers absorbing a significant share of the added costs to protect their market share. At the same time, firms accumulated inventory before the tariffs took effect, enabling importers to delay price pass-through and mitigate the impact on profits. The Penn Wharton Budget Model estimates that these pre-emptive moves saved US importers as much as $6.5bn - equivalent to 13.1% of the new tariff bill through May 2025.
Trump u-turns offer respite
The administration's reversal of its own policies has had even more profound growth-recovering effects. Specifically, Trump often delayed tariffs and reversed those that were either very inflationary or too harmful to growth. For example, the cost of coffee rose by more than 40% between September 2024 and September 2025, leading the administration to cancel the tariff increases. Additionally, Trump exempted goods from Canada and Mexico from the 25% tariff implemented on 6 March 2025, helping to maintain growth and output expansion in the US auto industry, which is closely linked to North American supply chains and was at risk from his trade policies. In April, Trump issued a presidential memorandum excluding many electronics - such as smartphones, laptops, and computer components - from high "reciprocal" tariffs on China, offering considerable relief to tech firms and reducing consumer costs.
These partial reversals, a temporary truce with China, and framework deals quickly negotiated with its major trading partners and allies (including the EU, UK, Switzerland, Japan, and South Korea), significantly reduced the originally-announced tariff rates, lessening the inflationary and growth-crushing effects of Trump's trade war. As the new duties drove up prices for consumer goods and intermediate inputs, inflation surged, and real incomes fell. This eroded firms' profit margins and weakened household purchasing power, stifling consumption and growth.
While the EU has seen inflation converge to its target range, the US has experienced persistent inflation, which remains stubbornly above the Fed's 2% target. By late 2025, the US Personal Consumption Expenditure price index, the Fed's preferred measure, indicated annualised inflation of around 2.8%, a slight rise from 2.6% in 2024. Although its trade-to-GDP ratio (around 27%) is lower than that of many other countries (the global average is around 63%), the US depends heavily on imported intermediate goods for domestic manufacturing and imported final goods to keep prices low. This helps increase overall consumer spending and boosts the productivity and competitiveness of US firms.
Meanwhile, the US labour market continues to weaken, with significant reductions in the federal workforce and slower private sector hiring. The unemployment rate has increased to more than 4.6%, the highest level in more than four years. It may rise further and more quickly as potential workers face difficulties securing suitable jobs in the private sector, where uncertainty continues to suppress investment, and public spending cuts lead to additional layoffs in federal, state, and related sectors. The broader U-6 unemployment rate, which includes discouraged workers and those working part-time for economic reasons, rose to a seasonally adjusted 8.7% in November, reflecting a sharp increase in involuntary part-time employment. Unsurprisingly, job prospects have plummeted, with expectations hitting a record low in the Federal Reserve Bank of New York's December survey, which has been conducted since 2013.
Although Trump's trade war did not precipitate the anticipated collapse of the US economy, it has transformed growth in the world's largest economy into a jobless expansion, in which weak labor demand further diminishes purchasing power. This decoupling of US GDP growth from job creation presents notable risks to future growth, especially since domestic demand accounts for more than two-thirds of US economic expansion and has been the most resilient driver of global growth and trade. Typically, every US growth cycle relies on a close, reinforcing relationship between job creation and rising consumer spending, with strong employment supporting consumer confidence and maintaining ongoing economic growth.
Near-term risks
The near-term outlook faces increased risks, most notably from two interconnected factors: persistent inflationary pressures and falling consumer demand. Inflationary pressures caused by Trump's tariff policy may intensify in 2026 as the resilience afforded by frontloading imports fades and companies pass through a higher share of costs to consumers. Additionally, the growth pattern - which has been highly uneven, showing a "K-shaped" trend that benefits affluent Americans with rising stock wealth and further widens the income gap between Wall Street and Main Street - might compress demand among lower-income households.
Recent analyses indicate that the adverse effects of Trump's tariffs - higher consumer prices, reduced economic output, and sticky inflation - are expected to outweigh any potential growth from fiscal policies. These tariffs function as a hidden tax that diminishes the benefits of tax cuts under Trump's "One Big Beautiful Bill", especially for lower-income households. Many of these households are also facing higher healthcare costs after the expiration of the enhanced Affordable Care Act premium tax credits in December 2025. Additionally, uncertainties around US trade policy - including the impending expiration of the trade truce with China and the future of trade agreements with Canada and Mexico, which are set for review in 2026 - exacerbate risks to the economic outlook.
Winning a trade war has always been difficult, and today's interconnected global supply chains make it even harder. While Trump's policy reversals and partial trade agreements may have reduced some economic and social costs of a full-scale trade war, they haven't completely eliminated the harmful effects of his policies or the uncertainty about future economic conditions. Looking ahead, the greatest risk to the US and global economies remains Donald Trump.
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