Daily Times

Donald Trump’s return to the White House in 2025 could mark a seismic shift in global economic dynamics. His anticipated policies, from trade tariffs to deregulation and tax adjustments, would likely influence international markets, trade relations, and monetary policies, which are being widely debated by experts across the globe.

A renewed focus on protectionism under Trump could strain international trade. Proposed tariffs on imports, particularly from China and the European Union, could raise the US effective average tariff rate to 4.3 percent, the highest since the 1970s. This could shrink US and global GDP by 0.5 percent and 0.2 percent, respectively, in the first year, and even more under a stricter tariff regime. Sectors like Chinese textiles and US transportation equipment could see the most significant impacts, exacerbating inflationary pressures globally.

Trump’s policy framework, which includes tax cuts and infrastructure spending, might provide a short-term boost to US GDP – up to 0.6 percent above baseline by 2027 under moderate scenarios. However, these measures could fuel inflation, with projections of a 0.3-percentage-point rise in core inflation by 2028. The Federal Reserve might respond with tighter monetary policies, raising interest rates and strengthening the dollar, which could challenge emerging markets reliant on US trade.

Trump’s stance on China and other trading partners might deepen regional economic fragmentation. His tariffs and trade policies could reduce global interdependence, with developing nations bearing the brunt. Countries like Mexico, which are tied to US trade deficits, may face heightened scrutiny, while China might counteract with aggressive fiscal measures to stabilize its economy.

Trump’s stance on China and other trading partners might deepen regional economic fragmentation.

What is also intriguing is President Trump’s potential withdrawal from international climate agreements and support for fossil fuels could boost the US energy sector but isolate the nation from global sustainability efforts. Rising oil prices, influenced by US policies in the Middle East, could further strain energy-importing nations. I have been the biggest supporter of “going black before going green” for Pakistan as well. It will be interesting to see how this impacts the global climate efforts.

Most interesting is the market’s reaction to Trump’s victory especially in the emerging economic zones. Emerging markets, especially in Asia, are vulnerable to these changes due to weakened currencies and limited monetary policy options. This brings me to the case of Pakistan which has heavily relied on US aid since its inception and is now shifting its tilt towards the country once again. Historically, Pakistan’s economic and security ties with the United States have been shaped by geopolitical imperatives, but these could shift in significant ways under a second Trump administration.

Pakistan’s current economic crisis, characterized by mounting external debt and limited foreign reserves, makes its reliance on international lenders like the International Monetary Fund (IMF) critical. The US, as the IMF’s largest stakeholder, has considerable influence over the terms of its assistance programs. Under Trump’s “America First” policies, Islamabad may face stricter conditions or reduced leverage to secure softer terms for IMF packages.

This would strain Pakistan’s fiscal space, given its current $3 billion standby arrangement with the IMF. Historically, US military aid to Pakistan peaked during the War on Terror, with $33 billion provided from 2002 to 2018. However, Trump’s first term saw a sharp decline in assistance, particularly after he accused Pakistan of harbouring terrorists. A second term might further reduce military and security aid unless Pakistan aligns itself with US counterterrorism objectives, potentially putting additional pressure on its defence capabilities.

We are also aware of Trump’s antagonistic approach toward China which could intensify Pakistan’s balancing act between its strategic partnership with Beijing – especially through the China-Pakistan Economic Corridor (CPEC) – and its traditional reliance on US support.

Increased US scrutiny or sanctions on Chinese investments are already spilling over to Pakistan, complicating its ability to secure necessary funding for infrastructure and development projects. Trump’s preference for India as a strategic counterweight to China in the Indo-Pacific is also a major indicator of tough times for Pakistan.

I have previously mentioned the IMF’s ultimate strategy for denuclearization of Pakistan. In the realm of nuclear security, Trump’s administration could also impose stricter monitoring of Pakistan’s arsenal, increasing diplomatic tensions. This becomes particularly complicated, especially in light of the latest terror wave targeted against Chinese workers. Where the US is trying to reestablish its economic control over Pakistan, China will look to secure its $64 billion investment in the CPEC by gaining boots on the soil. Hence the latest security collaboration suggestion to Pakistan by China and Russia will not be taken lightly by US think tanks.

While Trump’s policies may spur domestic growth in the short term, their global implications could disrupt trade flows, increase economic volatility, and test international alliances. I foresee a precarious balancing act between stimulating US growth and mitigating broader financial risks. This crossroads underscores the interconnectedness of global markets and the weight of US policies in shaping economic trajectories.

As the world braces for potential upheavals, investors and nations alike must navigate a landscape fraught with opportunity and risk. On the other hand, President Trump’s policies might bring short-term opportunities for tactical collaboration, but the long-term outlook suggests heightened challenges for Pakistan’s economic and geopolitical stability. Islamabad would need to navigate these shifts carefully to avoid deepening its financial and strategic vulnerabilities.

The writer is Foreign Research Associate, Centre of Excellence, China Pakistan Economic Corridor, Islamabad.