When President Trump unleashed the tariff war on “liberation day” in April of this year, many economists stayed true to their vocation of belonging to the “dismal science”. Catastrophic scenarios were forecast and economic doomsday was freely predicted. Six months on, what is the state of affairs?
Well, it must be admitted that things could have been a lot worse. Indeed, the IMF in its World Economic Outlook released on October 14, 2025 stated that the good news is that the growth downgrade is at the modest end of the range, with global growth projected at 3.2% this year and 3.1% next year, while inflation has increased modestly and is proving more persistent now. More importantly, the IMF stated that the impact of tariff measures was milder than expected due to trade exemptions, increased stocking up, restrained retaliation, and swift private-sector adjustments. Loose financial conditions, expansionary fiscal policies in key economies, and booming U.S. investment in AI and technology further softened the impact. This then is the good news. The bad news is that the IMF also went on to add : The tariff shock is here and it is further dimming already-weak growth prospects. This is clear even in the US; growth is revised down from last year. The labor market is weakening and inflation has been revised up and is persistently above target, signs that the economy has been hit by a negative supply shock. So, is this the proverbial calm before the storm?
The former IMF Chief Economist, Gita Gopinath, has in fact warned (in an article in “The Economist”) recently that the current rally in American stock markets, fuelled by Artificial Intelligence, may be setting the stage for a subsequent painful market correction. Indeed she goes as far as to predict that the impending crash, should it come to pass, could torch a whopping $ 35 trillion of wealth. Some economists argue that the irrational exuberance we are seeing now is reminiscent of the late 1990s, which ultimately led to the dotcom crash of 2000. Gita Gopinath makes the important point that the sheer scale of exposure, both domestic and international, to American equities now, as opposed to 2000, points to unprecedented interconnectedness and that any sharp downturn in American markets will reverberate around the world.
Against this backdrop, it is hard to overestimate the importance of the trade ties between the two biggest players of the global trading system: the US and China. It may be recalled that China has imposed fresh restrictions on exports of rare earths and critical minerals to the US, beginning December of this year. In response, President Trump, as is his wont, has threatened to impose a whopping extra tariff of 100 per cent on Chinese products to the US beginning 1 November. Both sides know the repercussions of this brinkmanship. So, it must be hoped that there will indeed be a meeting between Presidents Trump and Xi Jinping on the margins of the APEC Summit in South Korea, end of this month. One might say, without fear of contradiction, that the fate of the global economy hangs in the balance. As the latest edition of ” The Economist” points out, this spat between the two biggest players reveals a dangerous dynamic and a “balance of economic terror” cannot serve as the basis for stable economic ties between the US and China.
The Director General of WTO is at pains to point out that 70 per cent of global trade still happens on an MFN (Most Favoured Nation) basis although that share is decreasing every year. The WTO Secretariat also points out that the global import share of the US is about 13 to 14 per cent, so there is no need to exaggerate the impact of Trumpian tariffs. But this is easier said than done. There is the impact on global trade sentiment and investment is guided by non-quantifiable factors as well. As Gita Gopinath notes the spat between US and China would damage not just their bilateral trade but also global trade, since a number of countries are exposed to the world’s two largest economies via complex supply chains. She notes, ominously, that the structural vulnerabilities and macroeconomic context are more perilous today and that countries should therefore prepare for severe global consequences.
India is doing the right thing by trying hard to conclude a tariff deal with the US, doing everything in its power to conclude an FTA with the EU and recalibrate its economic and investment ties with China. It is also making attempts to diversify its trade with other partners in the world. This is all to the good. The one area where India could perhaps do more is in domestic economic reform. It is understood that India is a rough and tumble democracy and deep-seated economic reforms are easier said than done. But reform we must, for the alternative may be yet another missed opportunity for India. It is worth noting that 2025 has not been catastrophic for countries of the Gobal South including India. There is no reason, however, to think 2026 will follow suit.
Ambassador Dr Mohan Kumar is Director General of the newly established Motwani Jadeja Institute for American Studies at the O P Jindal Global University. Views are personal.
Diplomacy and Geopolitics 