Trump’s policies trigger lasting stagflation risk for global economy

Source: The post Trump’s policies trigger lasting stagflation risk for global economy has been created, based on the article “Stagflation for the ages” published in “Financial Express” on 26 April 2025.

UPSC Syllabus Topic: GS Paper2- International Relations

Context: The article warns of a deeper and lasting stagflation threat facing the global economy. This risk has been triggered by Donald Trump’s aggressive protectionist policies and political attacks on the U.S. Federal Reserve. Unlike temporary COVID-era disruptions, today’s supply-chain breakdowns and policy instability could cause severe inflation, recession, and global trade collapse.

For detailed information on Impact of Donald Trump’s economic policies on U.S. growth and inflation read this article here

Nature of Stagflation: Then and Now

1. Temporary Supply Chain Disruptions During COVID-19: After the pandemic, stagflation appeared when supply chains were strained by shifting consumption patterns. A surge in commodity prices, semiconductor shortages, and shipping bottlenecks accounted for about 60% of U.S. inflation during 2021–22.
2. Pandemic-Era Inflation Gradually Faded: Supply-chain stresses eased after about two years, helping inflation pressures to subside as global trade normalized.
3. Emergence of a More Permanent Crisis: Today’s stagflation threat stems from structural changes in supply chains, unlike the temporary pandemic disruptions.

Impact of U.S. Protectionism on Global Trade

1. Decoupling from China and Other Trade Partners: The U.S. is retreating from China-centric and even North American supply chains, reversing efficiencies that previously reduced U.S. inflation by about 0.5 percentage points annually.
2. Enduring Distrust in Trade Relations: Distrust of U.S. trade behavior will persist beyond Trump’s term, making the damage long-lasting and difficult to repair.
3. Complexities in Reshoring Production: Claims of a U.S. manufacturing rebirth are misleading. Reshoring requires years of planning and construction, which policy uncertainty now threatens.
4. Struggles to Rebuild Global Supply Chains: Other countries face prolonged efforts to establish new trade networks, risking higher costs and inefficiencies across global production systems.

Politicisation of Central Banking

1. Trump’s Pressure on the Federal Reserve: Trump criticized the Fed’s decision to hold rates steady and threatened to remove Chair Jerome Powell, undermining monetary policy independence.
2. Echoes of 1970s Stagflation: The situation resembles the late 1970s, when a weak Fed and a weak dollar worsened America’s first stagflation episode.
3. Broader Attacks on Independent Agencies: Trump’s dismissal of leaders from regulatory bodies signals a trend that could extend to the Federal Reserve, further destabilizing economic governance.

Rising Recession Risks

1. Uncertainty Paralyzing Business and Consumers: Widespread policy unpredictability is freezing business investment and consumer spending, heightening the risk of recession.
2. Global Retaliation Against U.S. Tariffs: New U.S. tariffs provoke retaliation, risking sharp declines in the global trade cycle essential for economic stability.
3. Historical Warning from Past Trade Wars: With U.S. tariffs higher than in 1930, the risks of a trade collapse similar to the Smoot-Hawley era are growing.
4. Stagflation or Worse: Given the scale of disruptions, the world could face not just stagflation but even deeper global trade and economic breakdowns.

Conclusion

The world faces a serious threat of lasting stagflation and recession. Disruptions in supply chains, rising protectionism, and political attacks on institutions could severely damage global trade, raise costs, and slow economic recovery for years.

Question for practice:

Examine how current U.S. protectionist policies and political instability are creating a deeper threat of stagflation and global economic disruption.