The year 2025 presented a global economic paradox: everything changed, yet on the surface, nothing seemed to. The United States imposed its highest tariff levels in nearly a century, triggering retaliation from China and escalating worldwide policy uncertainty. Despite this turbulence, global growth held steady at a projected 3.2 per cent, matching forecasts made before the trade conflict began. This apparent resilience, however, is a dangerous mirage.
According to an analysis by Gita Gopinath of the Financial Times, the structural damage from these protectionist measures is accumulating beneath the surface, much like the long-term economic impact of Brexit. The United Kingdom's experience serves as a stark warning: the initial economic shock was minimal after the 2016 referendum, but a decade later, the country is estimated to have lost six to eight per cent of its GDP compared to its pre-Brexit path. The lesson is that such foundational damage reveals itself slowly, often too late to reverse.
The Two Forces Masking the Tariff Impact
So why hasn't the global economy felt the full sting yet? First, the actual implemented U.S. tariffs, thanks to numerous exemptions, are around half of what was announced, though they still represent a sharp escalation to an average of 14 per cent. Two powerful forces have offset the consequences.
The first is the artificial intelligence boom. Surging investments in AI and a stock market rally fueled by AI optimism have bolstered U.S. economic growth. This wave also buoyed key exporters of AI-related goods, such as Taiwan and South Korea.
The second offsetting force was expansionary fiscal policy. Not only did the U.S. increase spending, but Germany and China pursued even more aggressive fiscal expansion. Together, these twin engines of AI investment and government spending cloaked the drag from American tariffs and Chinese countermeasures, creating an illusion of stability in 2025.
Fragility Beneath the Surface
The global economy is far more fragile than the headline growth number suggests. The AI sector itself is showing cracks. Investors are beginning to question the vast gap between sky-high valuations and actual returns. Companies like Meta Platforms Inc. have faced market punishment for signalling massive increases in AI spending without clear revenue streams to match.
The fundamental business challenge is becoming clear: AI prompts cost money. The current standard subscription fees, around US$20 a month, are unlikely to cover these operational costs or sustain the intense infrastructure arms race against new competitors. This is not a doubt about AI's transformative potential, but a serious concern about its near-term profitability, raising the risk of a dotcom-style correction.
The Real and Hidden Costs of Tariffs
The celebrated "resilience" to tariffs is deeply misleading. The costs have been significant and are disproportionately borne by the United States. Analysis indicates that roughly 95 per cent of tariff costs have been absorbed by U.S. firms, with only a portion passed on to consumers.
That portion, however, has had a direct inflationary impact. Tariffs alone have added 0.7 percentage points to U.S. inflation. Without them, inflation could have been at two per cent in 2025—hitting the U.S. Federal Reserve's target. Instead, the policy has made the typical American household US$600 poorer.
The takeaway is sobering. The temporary cloaking effects of AI investment and fiscal stimulus cannot last indefinitely. Unless the United States corrects its course on trade policy, the masked damage of 2025 will likely become painfully visible in 2026, revealing the true cost of a fragmented global trading system.
