Analysis-Trump tariffs pile stress on ailing world economy

LONDON/TOKYO (Reuters) -The latest round of U.S. trade tariffs unveiled on Wednesday will sap yet more vigour from a world economy barely recovered from the post-pandemic inflation surge, weighed down by record debt and unnerved by geopolitical strife.

Depending on how President Donald Trump and leaders of other nations proceed now, it may also go down as a turning point for a globalised system which until now had taken for granted the strength and reliability of America, its largest component.

"Trump's tariffs carry the risk of destroying the global free trade order the United States itself has spear-headed since the Second World War," said Takahide Kiuchi, chief economist at Nomura Research Institute.

But in coming months it will be the plain and simple price-hiking - and therefore demand-dampening - effects of new levies applied to thousands of goods bought and sold by consumers and businesses across the planet that will prevail.

"I see it as a drift of the U.S. and global economy towards worse performance, more uncertainty and possibly heading towards something we could call a global recession," said Antonio Fatas, macroeconomist at the INSEAD business school in France.

"We are moving into a world which is worse for everyone because it is more inefficient," said Fatas, who has acted as a consultant for the International Monetary Fund and World Bank.

Speaking in the White House Rose Garden, Trump said he would impose a 10% baseline tariff on all imports and held up a chart showing higher duties on some of the country's biggest trading partners, including 34% on China and 20% on the European Union.

A 25% auto and auto parts tariff was confirmed earlier.

Trump said the tariffs would return strategically vital manufacturing capabilities to the United States.

Under the new global levies imposed by Trump, the U.S. tariff rate on all imports jumped to 22% - a rate last seen around 1910 - from just 2.5% in 2024, said Olu Sonola, head of U.S. economic research at Fitch Ratings.

"This is a game changer, not only for the U.S. economy but for the global economy," Sonola said. "Many countries will likely end up in a recession."

IMF Managing Director Kristalina Georgieva told a Reuters event this week she did not see global recession for now. She added the Fund expected shortly to make a small downward "correction" to its 2025 forecast of 3.3% global growth.

But the impact on national economies is set to diverge widely, given the spectrum of tariffs ranging from 10% for Britain to 49% to Cambodia.

If the result is a wider trade war, that would have even larger repercussions for producers like China, which would be left hunting for new markets in the face of wilting consumer demand across the globe.

And if the tariffs push the U.S. itself towards recession, that will weigh heavily on developing countries whose fortunes are closely tied to those of the world's largest economy.

"What happens in the United States doesn't stay in the United States," said Barry Eichengreen, professor of economics and political science at the University of California, Berkeley.

"The economy is too big and too connected to the rest of the world via trade and capital flows for the rest of the world to be unaffected."

AN 'INVERTED WORLD'

The knock-on effects for policy-makers in central banks and governments are also potentially large.

An unravelling of the supply chains which for years kept a lid on prices for consumers could lead to a world in which inflation tends to run "hotter" than the 2% which central bankers currently agree is a manageable target to aim for.

That would complicate decisions for the Bank of Japan, which may face pressure to combat too-high inflation with more interest rate hikes just as its major counterparts eye cuts, and as its export-reliant economy takes a hit from U.S. duties.

Auto exporters Japan, hit with a 24% reciprocal tariff rate, and South Korea, which was imposed a 25% rate, have signaled plans to take emergency measures to support businesses hit by the higher U.S. levies.

Economies with weaker output growth would leave governments struggling even more to pay down the world's record $318 trillion debt load and find money for budget priorities ranging from defence spending to climate action and welfare.

And what if the tariffs do not bring about Trump's oft-stated goal of encouraging business to invest in domestic U.S. manufacturing, given the domestic labour shortages already facing a country with close to full employment?

Some see him seeking other ways to remove the U.S. global trade deficit that riles him so much - for example by demanding that others join in a re-balancing of foreign exchange rates to the advantage of U.S. exporters.

"We are going to continue to see him putting out there potentially more risky ways of dealing with the continuous strength of the dollar," said Freya Beamish, chief economist at investment strategy firm TS Lombard.

Such moves could jeopardise the privileged position of the dollar as the world reserve currency of choice - an outcome few predict, if only because there are for now no real alternatives to the dollar.

Nonetheless, European Central Bank President Christine Lagarde on Wednesday told an event in Ireland that Europe needed to act now and accelerate economic reforms to compete in what she called an "inverted world".

"Everyone benefited from a hegemon, the United States, that was committed to a multilateral, rules-based order," she said of the post-Cold War era of low inflation and growing trade in an open global economy.

"Today we must contend with closure, fragmentation and uncertainty."

(Writing by Mark John; additional reporting by Balazs Koranyi in Frankfurt; Karin Strohecker in London; Marius Zaharia in Beijing; Leika Kihara in Tokyo; Graphics by Marc Jones in London; Editing by Anna Driver and Lincoln Feast.)