Macroscope | World will need to borrow its way out of Trump’s tariff mess

While US President Donald Trump’s tariff wars might be laughably simplistic in their aim of balancing world trade, there is nothing amusing about the impact they are likely to have on the global economy.

The world appears to have not fully taken this on board yet. There has been little apparent awareness, for example, in market movements of the looming systemic financial threats that could arise from growing debt. This is especially so in the United States, which is dependent on foreign capital inflows to finance its trade and current account deficits.

The likely impact of Trump’s tariffs and other trade measures is being shrugged off by some as being hypothetical at this stage. Meanwhile, the potential impact on finance and banking systems is even less regarded or understood.

This applies not only to intangible – and admittedly not readily quantifiable – factors such as the effect on confidence, consumption and investment but also to the more measurable and potentially critical impact upon debt in an already over-indebted world. All these aspects could come together in an economic “perfect storm”.

The global debt mountain has been growing for years, rather like a volcano pushing upwards as molten lava accumulates beneath the Earth’s surface, ready to erupt with lethal force. Trump’s tariffs and trade wars could be the precipitating factor, as the latest Global Debt Monitor from the Institute of International Finance (IIF) reveals.

The report notes that global debt rose by US$7.5 trillion to a record of more than US$324 trillion in the first quarter of 2025. Much of the increase was accounted for by a surge in Chinese government debt, but the problem goes wider than China. In addition to China, the largest contributions to the first-quarter debt surge came from France and Germany.