DBRS: Where Will the Global Fallout from US Trade Policy Hit Hardest?

Key Highlights

• All regions of the world are being hit by US tariffs, but Asia and Europe are most directly affected.
• Although some countries have held off on retaliatory measures, retaliation could yet lead to escalating protectionism.
• There is still high uncertainty around how the tariff situation will play out and on the sovereign credit rating implications.

Notwithstanding the 90-day pause on reciprocal tariffs, except for China, the large, broad-based, and rapid increase in US tariffs to 10%, and to 25% on key manufacturing sectors, represents a disruption to global trade. Severe trade interruption between the US and China has serious implications. Incorporating the tariffs announced on April 2 and based on recent trade flows, the effective tariff rate on US imports would have jumped from 3% in 2024 to an estimated 23% should the pause not have taken place, the highest rate in over a century. Duties have been imposed on US allies and rivals alike and have been implemented with virtually no time for firms to adjust. We commented on April 3, and we maintain our view, that the disruptive effects of US trade policy will lead to slower economic growth and higher inflation in the US in 2025. Uncertainty remains high on how things will play out in tariff setting and, therefore, on the implications for global sovereign credit ratings.

In this commentary, we provide a preliminary assessment of the global economic fallout of rising US protectionism. While all regions of the world will likely be worse off, we find that Asia and Europe are more exposed to the tariff shock. Many economies in the Americas and the Middle East are comparatively insulated.

How Will Tariffs Affect the Global Economy?

The impact will likely be felt through several channels. In the near term, policy uncertainty itself will likely weaken demand for global goods and services, as households and firms around the world pull back on spending and investing until there is greater visibility on future tariff rates and the broader policy landscape. Commodity prices could decline further, and while it seems more unlikely now, international markets could again turn more risk-averse and spark capital flow volatility. For example, this could occur should the pause period elapse without satisfactory tariff agreements being put in place or should firms continue to hold back shipments in the face of tariff uncertainty. If the effective US tariff rate remains high, this will likely reduce and reorient global trade flows as firms aim to reduce production costs. We expect the resulting reorganization of trade to lead to overall efficiency losses, which will translate into higher prices for consumers. Among governments and the corporate sector, winners and losers will emerge over time as new trade patterns develop.

Significant Uncertainty in How Tariffs Will Play Out

There is still significant uncertainty around how the tariff crisis plays out and on the implications for sovereign credit ratings. President Donald Trump reversed course in short order, as the market backlash intensified and hit US government bonds. Outside of China, which quickly imposed blanket tariffs on US imports, the pushback to tariffs has been restrained thus far. Most countries in Asia held off on retaliatory measures, opting to begin negotiations with the Trump administration or pledging to reduce tariffs on US goods. The EU approved a first set of retaliatory measures from mid-April. Further measures will depend on how the US trade policy evolves. Canada has applied tariffs on a small share of US exports, while Mexico has held off on taking any retaliatory measures for now. As a result, the scale, duration, and durability of a trade shock and the impact on public finances remain uncertain. But as the world seeks potential relief through trade diplomacy, the global economy looks set to slow.

Tariff Impact by Region: China and Asian Economies Are Hit the Hardest

US tariffs will have a negative impact on China, although the magnitude of the impact could be mitigated by supportive monetary and fiscal responses. The application of a 125% levy will sharply curb US imports from China for all except the goods with the most inelastic demand. Demand for Chinese inputs into global supply chains could decline as other countries face high US tariffs. Regional trading partners’ demand for Chinese goods and services may weaken in a scenario where global growth slows. Furthermore, China could face rising protectionism if countries in Asia, Europe, and North America implement measures to stem the flow of redirected Chinese exports to protect domestic industries.

Outside China, East and Southeast Asian economies are the most adversely affected by the announced US tariffs. This is due to the region’s high share of exports to the US (which has risen since the first Trump administration imposed bilateral tariffs on China) and the sharp increase in US duties. Vietnam, Taiwan, and South Korea appear particularly vulnerable. Vietnam, for example, will face a 46% levy. While the adverse effects on these economies may be partly mitigated by the fact that these countries’ primary competitor, China, faces even higher duties, growth will likely weaken due to the direct effects of US tariffs, the indirect effects of weaker regional demand, and deteriorating investment conditions. Australia and Indonesia are less vulnerable, as they export little to the US, but lower commodity prices could weaken growth prospects and fiscal positions. India looks comparatively well-positioned, despite being hit with a 26% tariff, given the relatively closed nature of the Indian economy.

European Auto Sector Hit Especially Hard

We expect the impact of US tariffs on the European Union to be high relative to other regions. This is primarily due to the large exposure to manufacturing, particularly the automotive sector. Germany and some Central and Eastern European countries will be likely hit the hardest, given the imposition of 25% tariffs on automobiles and auto parts and how the automotive supply chain is integrated among these economies. While no specifics have been announced yet, impending tariffs on the pharmaceutical sector could negatively affect Ireland. Nevertheless, we believe there are mitigating factors to the economic impact. For example, Germany could at least partially absorb the impact, relying on its fiscal space and the planned upswing in infrastructure and defense spending. In Italy, which is also highly exposed to the US market, goods exports tend to be of high quality and may be somewhat less sensitive to tariffs. The United Kingdom faces a 10% tariff, but its limited exposure to the US should result in a relatively contained economic impact in the near term. Overall, we expect governments to provide some support to cushion the economic impact, but this support—on top of higher defense spending—will likely lead to slower fiscal repair and more challenging debt/GDP ratio reductions.

Canadian and Mexican Fallout Yet to be Determined

Canada and Mexico have been under the threat of punishing US tariffs for several months but have thus far escaped the worst of the threatened trade restrictions. USMCA-compliant goods have been largely exempted, including energy—Canada’s largest export to the US. However, tariffs on steel, aluminum, autos, and goods that are not compliant with USMCA have been enacted and are likely to cause some economic pain. In addition, other sectors (such as auto parts, lumber, and pharmaceuticals) remain under threat. The weakening growth outlook for the global economy, and particularly that of the US, will weigh on Canada and Mexico, increasing the likelihood of recessions in 2025.

South American Impact Contained

The direct impact of US tariffs on South America will be comparatively modest, but the region is not immune to deteriorating global conditions. Overall, South America is not particularly reliant on trade with the US and is much less integrated into global value chains than Asia, Europe, or North America. In addition, most countries in the region are only subject to the baseline 10% duty. With exemptions on certain commodity exports, the effective tariff rate will be even lower. Trade diversion could even benefit some countries: China’s retaliatory tariffs on US exports, for example, are likely to lead to greater purchases of agricultural products from Brazil and Argentina. Although the direct impact of US tariffs may be modest, the indirect effects of weaker global growth, lower commodity prices, and tighter external financing conditions could complicate the existing idiosyncratic challenges facing countries such as Argentina, Brazil, and Colombia.

Direct Impact on Middle East Is Not Significant; Impact on Africa Is Mixed

In the Middle East, the direct impact of the US tariffs is likely to be limited, while the indirect effects could be felt over time. Most of the economies in the Middle East will face only the 10% baseline tariff. Moreover, exports to the US account for a small share, and energy exports are exempt. The near-term growth and fiscal outlooks for the Middle East could weaken, largely reflecting some indirect effects of the US tariffs. Lower oil and gas prices will be the main channel through which the tariff shock will hit the oil exporters in the Middle East, while lower global trade could affect the trading hubs in the region. The Gulf countries are also exposed to developments in Asia, as China is a major trading partner. In Africa, while most economies will only face the 10% baseline tariff, some countries will be hit hard. Of the five largest economies in the African continent, South Africa and Algeria will see reciprocal tariffs of 31% and 30%, respectively. Some small economies—Lesotho, Madagascar, and Mauritius—are set to face even higher tariffs of over 40%. The exemption of some energy and mineral exports from the tariffs will only soften some of the impact on these African countries.