Trade War Escalates: How U.S. Tariffs Are Reshaping the Global Economy

Macroeconomic Summary – March 5, 2025

Global markets are facing heightened uncertainty due to escalating trade tensions, fiscal policy shifts, and evolving economic strategies from major economies. The U.S. has imposed 25% tariffs on imports from Mexico, Canada, and China, raising concerns over stagflation and pushing stock markets lower. Germany is planning a substantial spending boost to counter economic stagnation, while China has set an ambitious 5% growth target, focusing on innovation and self-reliance. Investors are increasingly wary of the U.S. economy, shifting focus to European and Asian markets. Meanwhile, Canada and Mexico are preparing retaliatory measures against U.S. tariffs, fueling further trade friction.

United States

Trade Policies and Economic Outlook: President Trump has imposed 25% tariffs on Mexico, Canada, and China, increasing fears of stagflation (stagnant growth + inflation). Economists warn that sustained tariffs could lead to higher consumer prices and lower corporate profits, pushing the U.S. economy toward a recession reminiscent of the 1970s.
Market Reactions: The U.S. stock market has seen sharp declines, with the Nasdaq Composite down 7.5% since mid-February. Sectors sensitive to economic downturns, such as banking and smaller companies, are the worst hit.

Eurozone

Germany’s Fiscal Expansion: Germany is planning a €500 billion infrastructure fund and easing debt constraints on defense spending. The economy is expected to grow only 0.1% this year, but economists project that the new fiscal stimulus could push growth towards 2% in the coming years if external conditions stabilize.

China

Economic Targets and Self-Reliance: China has set a 5% GDP growth target for 2025, with its budget deficit rising to 4% of GDP (from 3% in 2024). The government is prioritizing innovation and domestic self-sufficiency, particularly in areas like AI and semiconductors.
Trade Strategy: China plans to boost domestic demand and remain flexible in dealing with external threats like U.S. tariffs.

Other Notable Developments

Canada and Mexico’s Response to U.S. Tariffs: Canada and Mexico are preparing countermeasures against U.S. tariffs.
In Canada, Prime Minister Trudeau has called for boycotts of U.S. goods and a cancellation of U.S. vacations.
In Mexico, President Claudia Sheinbaum is expected to announce retaliatory trade measures, signaling rising tensions with Washington.