The global economy is projected to be significantly influenced by tariffs and evolving trade dynamics through 2026. Forecasts indicate a continued slowdown in global economic growth, with the International Monetary Fund (IMF) revising its 2026 growth projection to 3.1%. Tariffs, primarily those initiated during the Trump administration, have reshaped the international trade landscape, increasing costs and uncertainty for businesses. However, factors such as lower interest rates and tariff exemptions have partially mitigated their adverse effects. Legal challenges to the tariffs persist, with a pending US Supreme Court decision on their legality.
Global Economic Growth Forecasts
The International Monetary Fund (IMF) anticipates global economic growth will slow to 3.1% in 2026. This represents a reduction from the IMF's previous forecast of 3.3% made a year prior and is below the pre-COVID-19 average of 3.7%. Kristalina Georgieva, head of the IMF, stated that the current growth rate is "too slow to meet the aspirations of people around the world for better lives." Other forecasts for 2026 suggest potentially lower growth rates than those projected by the IMF.
Tariff Implementation and Rationale
The Trump administration implemented and proposed a range of tariffs, which are taxes on imported goods, across various countries and products. These actions were primarily driven by stated economic objectives and utilized as leverage in international relations.
Former President Donald Trump asserted that tariffs would contribute to job creation, wage increases, and economic growth in the United States. His administration outlined several reasons for employing tariffs, including increasing government tax revenue, promoting domestic consumption of American-made products, boosting investment within the United States, and narrowing the US trade deficit. The administration maintained that the US had experienced unfair trade practices by foreign partners. Tariffs were also used to exert pressure for other demands, such as urging China, Mexico, and Canada to enhance efforts against illegal immigration and the flow of fentanyl into the US. Many announced tariffs underwent subsequent amendments or delays.
In some instances, the administration announced intentions to impose tariffs on allied nations, including the UK, Denmark, Norway, Sweden, France, Germany, the Netherlands, and Finland, due to their opposition to a potential US acquisition of Greenland. These proposed tariffs were planned to start at 10% and increase to 25%.
Economic Impact and Cost Burden
Tariffs have increased costs for businesses and heightened uncertainty, complicating long-term planning and investment. Maurice Obstfeld, a former chief economist at the IMF and a senior fellow at the Peterson Institute for International Economics, notes that "these frictions and uncertainties take their toll over time," potentially leading to efficiency losses.
A study by the Kiel Institute for the World Economy, a German research organization, indicates that US buyers have borne the primary portion of the costs associated with US tariffs. The research determined that approximately 96% of tariff burdens were covered by US importers and consumers, while foreign exporters covered about 4%. The study, based on an examination of over 25 million shipment records totaling nearly $4 trillion from January 2024 to November 2025, found a "near-complete pass-through" of tariffs, meaning US import prices increased almost in proportion to the tariffs applied. These findings align with research from other institutions, including Harvard Business School and Yale's Budget Lab.
Tariff costs initially affect American importers and wholesalers, which are then often transferred to manufacturers and retailers, ultimately leading to higher prices for American consumers on both imported goods and American-made products that utilize foreign components. The study also noted a more limited availability of goods within the US market.
Aditya Bhave, a senior economist at Bank of America, estimates that tariffs have contributed between 0.3% and 0.5% to US inflation. US inflation stood at 2.7% in November, the UK's rate was 3.2%, and the Eurozone's was 2.1%. Both the US and UK rates remain above their respective central banks' 2% targets.
Mitigation Factors
Several factors have reportedly mitigated the negative effects of tariffs on the global economy:
- Lower interest rates
- A decline in the value of the dollar
- Businesses adopting alternative strategies
- Numerous tariff exemptions
These factors may explain the UN trade agency UNCTAD's forecast of a 7% growth in global trade last year, reaching over $35 trillion (£26 trillion). Obstfeld points out that while tariff exemptions reduce the practical impact of tariffs, they also introduce uncertainty regarding their procurement. Countries such as the UK, South Korea, and Japan have successfully negotiated trade agreements, and other nations may seek similar outcomes.
United States Economic Performance
Between July and September, the US economy expanded by 4.3%, marking its highest annual growth in two years. This resilience has been noted by economists, with consumer spending significantly driving the US economy, which accounts for 26% of the global economy, according to the IMF.
Legal Challenges to Tariffs
The legality of tariffs imposed by the Trump administration has faced multiple legal challenges. Instead of seeking Congressional approval, the administration invoked the 1977 International Emergency Economic Powers Act (IEEPA) by declaring an emergency. In August 2025, a US appeals court determined that most of these tariffs were illegal but permitted them to remain in effect. The White House subsequently requested the US Supreme Court to review this decision. A Supreme Court decision invalidating the tariffs could lead to complications, particularly concerning potential refunds.
Specific Country Tariff Situations
- China: Initially faced threats of over 100% tariffs from the US, with reciprocal threats from China. A truce was extended, and in October, an announcement was made regarding a pending trade deal and an immediate cessation of some tariffs related to Beijing's role in fentanyl ingredient flow. Tariff exclusions on 178 Chinese products were extended until November 2026, though other tariffs persisted on non-exempt goods.
- Canada: Was subject to 35% tariffs on certain goods, though most were exempt under the US-Mexico-Canada Agreement (USMCA). Canada was also affected by a 50% levy on imported metals and 25% on non-US automobiles. Following an anti-tariff advert broadcast by Canada, trade discussions were suspended, and threats were made to raise Canadian levies by an additional 10%, which reportedly led to an apology from the Canadian Prime Minister.
- Mexico: Faced 30% tariffs on goods, alongside sector-specific levies and a 25% fentanyl tariff. Similar to Canada, most Mexican goods were exempt under the USMCA. These tariffs were temporarily halted to facilitate a deal, with the deadline extended by several weeks following an agreement between President Claudia Sheinbaum and former President Trump.
- United Kingdom: In June 2025, the UK secured a 10% US tariff rate, which was the lowest negotiated rate at that time. This rate applied to the first 100,000 UK vehicles exported annually, with additional vehicles incurring the standard 25% tariff. The agreement also facilitated reciprocal beef trade and granted 0% tariffs on some US ethanol. While a complete removal of all charges on steel imports from the UK was anticipated, it was reportedly put on hold, with the UK paying 25% instead of 50%.
Consumer Impact and Affected Goods
The administration ended an exemption for imports valued at $800 or less, subjecting low-cost goods from online retailers to duties. Proposed tariffs of nearly 92% on certain imported pasta were reduced following engagement with involved firms. Conversely, an executive order in November exempted various food products, including avocados, bananas, beef, and coffee, from tariffs due to insufficient domestic production.
US consumers observed price increases for items such as toys, appliances, furniture, and specific foodstuffs. US inflation increased during this period. Several major retailers, including Target, Walmart, and Adidas, indicated their intention to pass tariff-related costs onto customers. The cost of goods manufactured in the US using imported components was also projected to rise, partly due to complex international supply chains.
Other Global Economic Influences
- Trade Agreements: Other potential influences on the global economy include the renegotiation of the US-Mexico-Canada Agreement (USMCA) and a pending vote by EU member states on ratifying a South American trade deal.
- Oil Prices: Goldman Sachs forecasts an approximate 8% fall in benchmark Brent Crude prices this year, settling around $56 a barrel. This projection is based on strong production levels in the US and Russia.
- Shipping Routes: The potential resumption of global shipping through the Red Sea could further reduce oil prices. Shipping company Maersk navigated a container ship through the Red Sea in late December, the first time in nearly two years. Major shipping firms have largely avoided the route due to attacks by Houthi rebels in Yemen, linked to the conflict in Gaza, opting instead for the longer and more costly route around southern Africa. A full return to the trans-Suez corridor is not yet scheduled.
US-China Trade Dynamics
Trade relations between Beijing and Washington continue to influence the global economy. Data indicates that the value of goods exchanged between the United States and China declined for the third consecutive year in 2025. President Xi Jinping's 2026 New Year message projected China's economy to reach $20 trillion and affirmed China's readiness "to work with all countries to advance world peace and development," without explicitly addressing trade tensions or domestic economic pressures.
Discussions between the US and China have primarily focused on tariffs, US access to rare earth metals, and Chinese access to high-end US computer chips. Additional issues are anticipated for resolution during an upcoming meeting between President Xi and former President Trump in April. Beijing seeks an equitable opportunity to compete globally and perceives certain environments as restrictive towards Chinese companies, partly due to an "over emphasis on security concerns." US concerns include "how China manages its manufacturing output," with overcapacity being an issue affecting multiple economies. This refers to situations where China's manufacturing output, particularly for consumer goods, exceeds demand, potentially leading to a significant oversupply globally.
European Market Dynamics
Research from Dutch bank ING indicates that European reliance on lower-cost Chinese imports is increasing. The EU is expected to implement measures regarding this trend in the coming months.