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Global Economy Absorbs Trade War Shock

Global Economy Absorbs Trade War Shock

IMF Reports Resilience as AI Investment Offsets Tariff Damage—But November Deadline Looms

Overview

In April 2025, average US tariffs hit their highest level since 1943. Nine months later, the global economy is still growing. The IMF's January 2026 World Economic Outlook projects 3.3% global growth—slightly better than feared—as businesses rerouted supply chains, AI investment surged, and a US-China truce pulled tariffs back from their 145% peak.

The relief may be temporary. The US-China deal expires November 10, 2026, and IMF chief economist Pierre-Olivier Gourinchas warns that risks remain 'tilted to the downside.' If the truce lapses, tariffs could snap back. If AI fails to deliver productivity gains, a market correction could follow. The global economy survived the shock; whether it survives the aftershocks depends on decisions made in the next ten months.

Key Indicators

3.3%
2026 Global Growth Forecast
Up 0.2 percentage points from October estimate, exceeding pre-tariff projections
18.5%
Effective US Tariff Rate
Down from 25% projected in April 2025; still highest since 1943
$202B
2025 Global AI Investment
50% of all venture capital deployed worldwide
Nov 10
US-China Truce Expiration
Bilateral tariff reductions and export control pauses end November 2026

People Involved

Pierre-Olivier Gourinchas
Pierre-Olivier Gourinchas
IMF Chief Economist (Active)
Kristalina Georgieva
Kristalina Georgieva
IMF Managing Director (Active (second term began October 2024))
Donald Trump
Donald Trump
President of the United States (In office (second term))
Xi Jinping
Xi Jinping
President of China (In office)

Organizations Involved

International Monetary Fund
International Monetary Fund
International Financial Institution
Status: Primary source of global growth forecasts

The IMF publishes the World Economic Outlook twice yearly with interim updates, providing the benchmark forecasts against which trade policy impacts are measured.

WO
World Bank Group
International Financial Institution
Status: Parallel forecaster tracking developing economy impacts

Publishes Global Economic Prospects reports that complement IMF forecasts with focus on developing economies.

Office of the United States Trade Representative
Office of the United States Trade Representative
Executive Branch Agency
Status: Implementing tariff policy and exemptions

The agency managing tariff exemptions, Section 301 exclusions, and trade deal implementation.

Timeline

  1. IMF January 2026 WEO Update: Growth Exceeds Pre-Crisis Expectations

    Report

    Global growth projected at 3.3% for 2026, up 0.2 points from October. Chief economist Gourinchas: economy 'shaking off' trade disruptions, now ahead of October 2024 forecasts made before tariff escalation.

  2. World Bank Reports 'Surprising Shock-Proof' Economy

    Report

    Global Economic Prospects projected 2.6% growth for 2026, noting resilience despite 'historic' trade tensions but warning the 2020s will be the weakest growth decade since the 1960s.

  3. US-China Trade Framework Officially Announced

    Policy

    Deal extends reduced tariffs to November 10, 2026; suspends BIS Affiliates Rule; lifts rare earth export controls. China commits to $25B annual soybean purchases through 2028.

  4. Trump and Xi Meet in Busan, Reach Framework Deal

    Summit

    Bilateral summit produced a one-year framework covering tariff reductions, export control pauses, and Chinese agricultural purchases.

  5. IMF October WEO: Damage 'At Modest End of Range'

    Report

    Global growth forecast revised up to 3.2% for 2025 as trade deals reduced tariffs, supply chains adapted, and most countries avoided retaliation.

  6. US-China Truce Extended Another 90 Days

    Negotiation

    Both parties agreed to extend reduced tariff rates while negotiations continued on a more comprehensive framework.

  7. Federal Court Rules Liberation Day Tariffs Exceeded Authority

    Legal

    US Court of International Trade ordered tariffs vacated, finding Trump overstepped authority under IEEPA. Appeals court stayed the ruling pending review.

  8. US and China Announce 90-Day Tariff Truce

    Negotiation

    Both countries agreed to reduce April tariffs from 145%/125% to 30%/10% for 90 days pending further talks. First major de-escalation since Liberation Day.

  9. IMF Releases WEO with Tariff Damage Scenarios

    Report

    The Fund offered a range of estimates from modest to significant damage depending on tariff severity, projecting 3.0% global growth for 2025.

  10. US-China Tariffs Peak at 145%/125%

    Escalation

    After tit-for-tat retaliation, US tariffs on Chinese goods reached 145%; China imposed 125% on US goods. Trade between the two economies nearly froze.

  11. Trump Pauses Reciprocal Tariffs for 90 Days—Except China

    Policy

    Country-specific tariffs paused for all nations except China, which faced the full 145% rate. Baseline 10% tariff remained for all other countries.

  12. Liberation Day: Trump Announces Sweeping Tariffs

    Policy

    President Trump announced a 10% baseline tariff on nearly all imports and higher country-specific rates, declaring a national emergency over the trade deficit. China-specific tariffs would eventually reach 145%.

  13. Stock Markets Crash on Tariff Announcement

    Market

    S&P 500 fell 4.88% (second-largest daily point loss ever); Nasdaq dropped 5.97% (largest point loss in its history).

Scenarios

1

Truce Renewed: US-China Extend Deal Past November 2026

Discussed by: IMF staff analysis, Coface economic outlook, trade policy analysts

Both sides find sufficient benefit in the current arrangement to extend it. China continues redirecting exports to non-US markets; the US avoids inflationary tariff spikes before midterm elections. Agricultural purchases and export control pauses continue. Growth trajectory remains stable around 3.2-3.3%.

2

Tariffs Snap Back: Deal Expires Without Renewal

Discussed by: Bloomberg trade analysis, Congressional Research Service, Council on Foreign Relations

Bilateral tariffs return to pre-truce levels—potentially 145%/125%—if negotiations stall over semiconductor controls, Taiwan, or rare earth restrictions. The IMF estimates renewed tensions could cut global output by 0.3% in 2027. Supply chains that rerouted in 2025 face further disruption. Congressional national security hawks in both parties could push legislation hardening restrictions regardless of White House preferences.

3

AI Correction Triggers Broader Slowdown

Discussed by: IMF January 2026 WEO, Stanford HAI, Bank of America research

If productivity gains from $200+ billion in AI investment fail to materialize, equity valuations could correct sharply. The IMF flags this as a primary downside risk—AI currently accounts for nearly 1 percentage point of US GDP growth. A pullback in tech investment would remove a key offset to trade headwinds, potentially pushing global growth below 3%.

4

Partial Deal: Tariffs Reduced on Some Goods, Raised on Others

Discussed by: Wiley trade law analysis, CSIS, China Briefing

The most likely outcome according to trade lawyers tracking the negotiations. Semiconductor and rare earth tensions persist while consumer goods tariffs remain reduced. Effective US tariff rate stays between 15-25%. Neither side claims victory; businesses continue managing uncertainty rather than planning around stable rules.

Historical Context

Smoot-Hawley Tariff Act (1930)

June 1930

What Happened

Congress raised tariffs on over 20,000 imported goods, increasing average rates from 40% to nearly 60%. President Hoover signed the bill despite a petition from 1,028 economists urging a veto. Henry Ford called it 'an economic stupidity.'

Outcome

Short Term

Canada retaliated within weeks, hitting 30% of US exports. France, Italy, and a dozen other nations followed. World trade collapsed 66% by 1934.

Long Term

Widely credited with deepening the Great Depression. Unemployment rose from 8% to 25%. The debacle shifted tariff authority from Congress to the executive branch, leading to the 1934 Reciprocal Trade Agreements Act and eventual creation of GATT/WTO.

Why It's Relevant Today

The 2025 tariff escalation—with US rates hitting their highest since 1943—invited immediate Smoot-Hawley comparisons. A key difference: most countries did not retaliate, limiting the damage. The historical lesson shaped IMF advice urging restraint.

Global Financial Crisis (2008-2009)

September 2008 - June 2009

What Happened

Lehman Brothers collapsed on September 15, 2008, triggering the worst financial crisis since the Great Depression. Global GDP fell 3.3% in 2009. World trade collapsed 18.6% as credit froze and demand evaporated.

Outcome

Short Term

The IMF's April 2008 forecast of 3.9% growth proved wildly optimistic; by November 2008 the Fund projected -0.3% for 2009. Coordinated G20 stimulus and central bank intervention prevented a deeper spiral.

Long Term

Recovery was uneven—advanced economies regained pre-crisis output by 2011, but the eurozone debt crisis extended pain. The experience created the policy playbook (massive fiscal and monetary support) used during COVID-19 and referenced during the 2025 tariff shock.

Why It's Relevant Today

The 2008-2009 trade collapse (18.6% in the US alone) dwarfed the 2025 disruption. That the global economy absorbed 145% tariffs with only modest growth reductions reflects both improved supply chain flexibility and the precedent of coordinated policy response established in 2008-2009.

COVID-19 Economic Shock (2020)

March-June 2020

What Happened

The pandemic triggered the sharpest global contraction since the Great Depression. IMF revised its growth forecast down 6.3 percentage points between January and April 2020—the largest revision in Fund history. Global GDP fell 3.3%.

Outcome

Short Term

Unprecedented fiscal and monetary stimulus ($12 trillion globally) prevented a depression. Supply chains proved more resilient than feared as businesses adapted to lockdowns.

Long Term

Inflation surged in 2022-2023 as stimulus met constrained supply. Central banks raised rates aggressively. The experience demonstrated both the economy's capacity to absorb shocks and the lagged costs of massive intervention.

Why It's Relevant Today

The same pattern—initial shock, rapid adaptation, better-than-feared outcomes—repeated in the 2025 tariff crisis. IMF chief economist Gourinchas explicitly noted businesses had become 'agile' at rerouting supply chains, a capability developed during COVID disruptions.

12 Sources:
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International Monetary Fund Business Today India Economy Middle East World Bank The White House Bloomberg Wikipedia China Briefing Goldman Sachs Coface Britannica International Monetary Fund