Four US economic policy shifts of 2025 and their impact on global markets

Astonishingly, these shakeups have failed to unsettle the US or global economy - but 2026 will tell whether that continues

In 2025, the world saw one tectonic shift in United States (US) economic policy and at least three others that were consequential. These shifts will not be easy to reverse even if there is a change in administration in the US down the road. How exactly they will impact the US and the world is unclear at the moment. What is clear is that the rest of the world will have to adjust to them. 

First, the tectonic shift. The US under President Donald Trump has decisively upended the free-trade regime that has underpinned the world economy for decades. The world has to live with a US base tariff level of 10 per cent, plus an element that will vary from country to country and from time to time, depending on how the US perceives its trade relationship with that country. 

 

This will be reinforced by even higher tariffs for sectors, such as steel and aluminium, which are perceived to be of strategic importance to the US economy. The weighted average tariff under President Trump has risen from below 3 per cent to around 19 per cent.

During the year, major nations settled for deals with the US that are hopelessly one-sided. The European Union (EU), for instance, faces a tariff of 15 per cent (with higher tariffs on steel and aluminium) while US exports to the EU face zero tariff. For the privilege of doing business with the US, the EU has committed to spending an additional $750 billion on US energy products (over three years), investing $600 billion in America, and buying US military equipment worth “hundreds of billions of dollars”. 

 

Japan, too, will face a baseline tariff of 15 per cent and will invest $550 billion in the US. The United Kingdom gets away with a tariff of 10 per cent because of the “special relationship” with the US. China has secured a one-year truce with the US that allows tariffs to settle at a staggering 47 per cent for one year. In return, China has agreed to lift restrictions on export of rare earths to the US and buy more soybean from the US. 

 

Switzerland was hit with a tariff of 39 per cent. Its President rushed to the US to negotiate a lower tariff but was rebuffed. Two months later, the US agreed to reduce tariffs to 15 per cent in return for $200 billion investment from the Swiss. India’s refusal to be rushed into a trade deal looks very brave in comparison with the abject surrender of nations that are incomparably richer.

 

The second shift has to do with immigration policy. The US administration has clamped down on border crossings, deported thousands of illegal immigrants, paused asylum applications, and attempted to limit birthright citizenship. 

 

Kevin Hassett, one of Mr Trump’s economic advisers and now a frontrunner for the post of chairman of the Federal Reserve, has argued that the issue is the quality of immigration. He notes that the US admits only 12 per cent of its immigrants on the basis of employment and skills, whereas 63 per cent of those admitted by Canada and 68 per cent of those admitted by Australia are selected for the skills they bring to these countries.

 

Mr Trump himself has lately spoken of the importance of H1B visas and foreign students in US universities. But the National Security Strategy document released by the White House recently makes the basic stance clear: “The era of mass migration is over”. There will be no retreat from the view that migration strains domestic resources, undermines social cohesion and threatens national security. 

 

A third shift is the Trump administration’s rejection of climate change and green energy as priorities. One of Mr Trump’s first acts after taking over as President in January 2025 was to withdraw from the Paris Agreement that committed all signatories to time-bound emission reduction plans. Mr Trump often calls climate change a “hoax” or a “con job”, renewable energy a “joke” and talks of “clean, beautiful coal”.  

The Trump administration is actively working to dismantle subsidies for renewable energy and electric vehicles, instead opening up more land and waters for oil drilling — “drill, baby, drill” is the motto. The National Security Strategy document declares emphatically, “We reject the disastrous ‘climate change’ and ‘Net Zero’ ideologies that have so greatly harmed Europe, threaten the United States, and subsidise our adversaries.”

 

Mr Trump’s actions will mean higher costs for the rest of the world in battling climate change. It will also mean fewer resources with which to battle it as the Trump administration axes billions of dollars that support climate change projects. It could result in other nations withdrawing from the Paris Agreement as they view the burdens imposed on them as unfair.

 

A fourth shift is the rise in the level of public debt in the US as well as in other advanced countries. Public debt in the US and other advanced countries has risen relentlessly since the global financial crisis of 2007, and had averaged 104 per cent of gross domestic product (GDP) even before the pandemic struck in 2020. Mr Trump passed his Big Beautiful Bill that retained the tax cuts of Trump-1 and boosted defence expenditure. The International Monetary Fund projects US government debt to rise from 122 per cent of GDP in 2024 to 143 per cent by 2030. The corresponding figures for advanced economy debt are 109 per cent and 119 per cent, respectively.  

 

Commentators worry that rising public debt in advanced countries poses a threat to macroeconomic instability in the global economy. Mr Trump’s economic advisors, however, believe that faster economic growth, tariff revenues and lower interest rates will cause government debt to fall to 94 per cent by 2034. That is one forecast that will be watched closely. But clearly, the dogma about the unsustainability of high levels of public debt that advanced countries preached to the developing world has gone out of the window. 

As the year draws to a close, the astonishing thing is that these massive shifts in economic policy have thus far failed to seriously unsettle the US economy, or the world economy, or the financial markets. The IMF projects growth in the world economy for 2025 at 3.2 per cent, just 20 basis points below last year’s. The US will grow at 2 per cent, compared to 2.8 per cent last year. US inflation is running at 2.8 per cent, which is way below what was feared following Mr Trump’s Liberation Day announcements. 

 

The US equity market touched an all-time high during the year, with a return of 13 per cent over the year. The yield on the one-year G-Sec in the US is a full 50 basis points below its level when Mr Trump assumed office. Pundits, who predicted economic apocalypse, are trying to find reasons why their forecasts went wrong. 

 

Has the moment of reckoning been merely deferred? Or is Mr Trump on to something? We should know for sure in 2026. 

 

ttrammohan28@gmail.com