Tariff uncertainty likely to weigh on global growth even after extended talks
President Trump Monday signed an executive order extending the date when his so-called reciprocal tariffs would take effect, with a pause previously scheduled to expire at 12:01 a.m. Wednesday.
Economists expect higher tariffs to directly impede economic growth by weakening demand for goods in the U.S. and exports to that country from the rest of the world. But uncertainty also comes with a cost as businesses delay decisions to invest or hire while they seek clarity on their access to the world's largest market.
The extension announced Monday means that clarity will not come this week, as many businesses had hoped. But it also allows time for governments to negotiate tariffs that are lower than those Trump set out on April 2, and then paused.
'Prolonged negotiations extend the uncertainty which is likely holding back investment decisions in the U.S. and its trading partners," said Holger Schmieding, chief economist at Germany's Berenberg Bank. 'However, the new timeline also strengthens the view that Trump will be flexible in the end."
Most economists expect global economic growth to slow this year as a result of higher tariffs and increased uncertainty, but there are a range of possible outcomes that depend on how much clarity is available to businesses, and how high the barriers to trade rise.
German insurance giant Allianz last week forecast that global economic growth will slow to 2.5% this year from 2.8% in 2024, with the U.S. seeing a much sharper deceleration to 1.5% from 2.8%. Those forecasts were based on the current level of tariffs.
There are signs that the uncertainty is having a significant impact on big investment decisions. The United Nations said some measures of overseas investments hit record lows in the early months of the year as details of the tariff increases were awaited, while financial data company Mergermarket estimated that the worldwide tally of mergers, acquisitions, divestitures, financings and joint ventures in the first half of the year fell to a two-decade low.
'What concerns us is the number of businesses that are delaying decisions and only treading water," said Sam Ashdown, an underwriter at Coface, which provides insurance to exporters against the risk of non-payment.
In a note to clients, Oxford Economics last week said it now expects investment spending in the Group of Seven largest rich economies to decline for the nine months from April, and by an average of 0.4% in each of those three quarters.
But while most businesses would like to see an end to uncertainty over the new regime for global trade, that is unlikely to come as soon as August. Talks over the coming weeks may settle the level of so-called 'reciprocal" tariffs, but other issues will remain open.
The Trump administration has launched a number of investigations into sectors that may have an impact on national security, and they will take time to reach a conclusion. But it is also possible that fresh tariffs will be imposed by Trump for other reasons.
Earlier this week, Trump threatened to impose a new 10% tariff on imports from a group of large developing economies that appeared to criticize his policies. In the president's hands, tariffs have a wide range of potential applications.
As a consequence, businesses are unlikely to be in a position to conclude that the tariffs they face are settled by the end of August, or in the years to come.
'Those threats are going to linger for the whole of the Trump administration," said Inga Fechner, a trade expert at ING Bank. 'If he's not happy with the general behavior of trading partners, he can opt for new tariffs."
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