Donald Trump’s second stint in the White House could generate positive global economic spillovers as tax cuts, deregulation, and fiscal stimulus deliver faster growth. But his isolationist instincts could also stoke inflation, depress cross-border trade, and add to international political upheaval. 

A full-scale escalation in trade hostilities seems unlikely, and isn’t our base case: US consumers won’t welcome sharp price increases, many congressional Republicans are ideologically opposed to trade barriers, and markets themselves should restrain policy extremes. 

But if the former president nonetheless follows through on campaign promises to impose 60% tariffs on Chinese goods and 10% duties on all other imports, the resulting trade war would hammer the world economy, with China, Mexico, Canada, and the euro area bearing the brunt—alongside the US itself. A positive rebalancing process could unfold as a fraying security guarantee pushes Europe toward greater defence spending, while forcing Germany’s new leaders to abandon the “debt brake”, boosting investment. Facing export constraints and weak consumer confidence, China might finally reform its social safety net, unlocking household spending.

Trade policy uncertainty is ratcheting higher.
Uncertainty indices, 12-month rolling averages
January 1986 – November 2024

Our forecasts, laid out below, conceal a messy reality: the distribution of potential currency market outcomes is likely to widen as pronouncements from the White House collide with unforeseen changes in economic fundamentals and shifts in market positioning.