More tariffs are hitting the global market as the European Union and the United States both have targeted China. Pierre-Olivier Gourinchas, IMF chief economist, sits down with Yahoo Finance Senior Reporter Jennifer Schonberger in Washington, D.C., to discuss how increased tariffs could weigh on the global economy.
Gourinchas sees increased tariffs and trade tensions as a major concern that could stunt global economic growth in 2025 and beyond. "Countries imposing measures or distorting trade are upwards of 3,000 of them now, compared to only 1,000 in 2019. And 2019 was not a low point," he tells Yahoo Finance.
He notes that if major markets move forward with higher tariffs against each other, trade policy uncertainty and retaliation will likely increase, weighing down the global economy. "About 0.5% of global output that would be lost by 2026 if we have this escalation in trade-distorting measures, tariffs, etc. So we're certainly concerned about that and concerned that it might hurt everyone," Gourinchas explains.
In terms of risks to the outlook and government policies, we are seeing more tariffs across the globe. Uh Europe slapped tariffs on uh Chinese EVs. We saw the Biden administration take similar action earlier this year, and Donald Trump has pledged to impose tariffs on all US export all US imports, rather. If we were to see that plan implemented and retaliation, what type of impact are we talking about on global growth as well as the global trading system? Would we see a reordering, would we see supply chain shocks?
Well, so we've we've actually flagged this as one of the concerns we have. There are, you know, potentially things that could improve growth. There are a number of things that could also weigh down on growth in 2025 and beyond. And one of them is we're seeing this rise in geo economic fragmentation, the rise in trade tensions, countries imposing measures are distorting trade, upwards of 3,000 of them now, compared to only a thousand in 2019, and 2019 was not a, you know, a low point. So we're seeing that that movie is being played right now. And so we did a scenario analysis in our report, and we said, okay, well, what if the major blocks start having higher tariffs against each other? And the and not only that, but that also increases what we call trade policy uncertainty. It's not just that you have tariffs. It's that you don't know what's going to happen next. There could be retaliation, there could be additional measures, and that further weighs down on investment and global activity. And you put these two things together, and the impact on the global economy is quite sizable, about 0.5% of global output that would be lost by 2026 if we have this escalation in trade distorting measures, tariffs, etc. So we're certainly concerned about that and concerned that it might hurt everyone.
And what about the impact on global inflation if we were to see this tariff regime implemented? And would this be sort of like a one-time reset or and then we're at a new level, or do we see longer-term implications there?
So the picture on inflation is a little bit more nuanced because it in it depends on how when you impose tariffs, how the prices are changing in the country that is imposing the tariffs versus on the country that is producing the goods that are being tariffs. And then you have tariffs on your imports, but then the other countries are putting tariffs as well, so your own goods are also being tariffed. So the overall picture on inflation is it doesn't seem that it's the first order effect. When we look at this adding tariffs and trade policy uncertainty, what is really happening is that you have this sort of weakening of the global economy, and that weakening of the global economy is the first order effect. Now, in terms of the persistence of the effect, it's certainly the case that we're seeing them in our scenarios. We're extending them until 2029. If we have higher tariffs, that's going to depress output permanently.
And then what does that mean for global interest rates? Do they continue on this downward trajectory?
Well, that will very much depend on how, uh, you know, the inf domestic inflation trajectory will change and how activity might change. You might see some countries if in some countries inflation pressures increase because of tariffs, then central banks would have to tighten policy rates. In other countries, you might see the opposite. You might see a weakening of economic activity, and you might not see that much price pressures. And in that situation, central banks would respond somewhat different.
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Higher tariffs could also impact the global inflation picture. He argues, "If in some countries inflation pressures increase because of tariffs, then central banks would have to tighten policy rates. In other countries, you might see the opposite. You might see a weakening of economic activity and you might not see that much price pressures. And in that situation, central banks would respond somewhat differently."
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This post was written by Melanie Riehl