Impact of Geopolitics in the World Economy
What are the geopolitical effects on the world economy?
The impact of geopolitics in the world economy: Key economic issues in the spotlight
As geopolitical tensions intensify and trade policies shift, the global economy navigates an increasingly uncertain landscape. From tariff escalations to reciprocal trade measures, the impact of geopolitics in the world economy is becoming more pronounced, reshaping growth trajectories, supply chains and inflation trends across regions. The recent resurgence in protectionist policies highlights how geopolitical instability can disrupt established economic relationships and trigger ripple effects worldwide.
In this environment, geopolitical risks is no longer a peripheral concern for businesses and policymakers — it is central to economic strategy and forecasting. Key geopolitical issues such as trade tensions, regulatory and legislative mechanisms, and shifting alliances directly influence financial markets, investment flows and central bank policies. As nations recalibrate their positions in response to external pressures, the geopolitical effects on the economy are becoming more complex and far-reaching.
This article explores the most pressing geopolitical issues facing the global economy, from reciprocal trade moves to regional disputes and shifts in global power dynamics. It examines how geopolitical instability influences monetary policy, corporate strategy and global supply chains — and why the economic outlook remains tightly linked to the geopolitical landscape. As policymakers and businesses grapple with these challenges, understanding the impact of geopolitics in the world economy is more critical than ever.
US tariff plans: US administration trade policy and geopolitical risk
Import tariffs remain central to US President Donald Trump's economic and foreign policy agenda. Leveraging a range of legislative and regulatory tools, Trump’s trade approach is reshaping global commerce at a time of growing geopolitical instability. His early policy outlines signal a return to aggressive tariff usage, with broad implications for global supply chains and geopolitics in the world economy.
Renewed tariff policy amid geopolitical tensions
The Trump administration is expected to pursue reciprocal tariffs, signaling a reassertion of protectionist trade policies. Key proposals as of April 2, 2025, included:
- Broad-based tariffs on imports from mainland China, including new landing fees on vessels built or owned by Chinese companies.
- Deferred action on Canada and Mexico, though tariffs on certain imports may still emerge.
- Expanded duties on steel and aluminum, as well as new levies on automobile imports.
- National security reviews targeting a wide range of goods, from critical minerals and copper to pharmaceuticals, electronics and forestry products.
- Introduction of a country-specific reciprocal tariff system.
- Investigations into multiple product categories, potentially leading to additional large-scale duties.
These measures signal a broader shift toward unilateral trade enforcement as a tool of foreign policy.
Corporate strategy and supply chain risk
Businesses are experiencing rising procurement costs, especially for intermediate goods crucial to manufacturing. Finished goods imports are also likely to become more expensive, leading to inflationary pressures that could erode consumer purchasing power.
To mitigate these effects, companies are reviving strategies from the first Trump administration, such as:
- Repricing product lines
- Renegotiating supplier contracts
- Realigning inventory management practices
- Accelerating reshoring initiatives
However, the renewed emphasis on tariffs risks disrupting long-standing supply chain relationships — particularly with China, Mexico and Canada — thereby underscoring the geopolitical effects on the economy and the fragility of global supply networks in an era of mounting geopolitical instability.
What are tariffs?
A tariff is a tax imposed on a good when it crosses a national border. Most commonly, tariffs are applied to imported goods, meaning they are paid by the importing business to its home country’s government. Tariffs are typically levied as a fixed percentage of the value of the imported item, increasing the overall cost of bringing that good into the country.
Why are tariffs used?
Tariffs serve multiple purposes in trade and economic policy. One common use is protecting domestic industries from foreign competition by making imported goods more expensive, encouraging consumers to buy domestically produced alternatives. They can also counteract unfair trade practices, such as foreign government subsidies that give imported goods an artificial price advantage.
In some cases, tariffs are applied to safeguard national security, especially when it comes to protecting strategic industries, as seen in tariffs imposed under Section 232 of the Trade Expansion Act of 1962. Additionally, tariffs have been used as leverage in trade negotiations, a strategy notably employed during the US administration to extract concessions in unrelated areas.
While tariffs can also generate government revenue, this is generally a secondary purpose in modern trade policy.
Why is President Trump focused on tariffs?
President Trump continues to position tariffs at the center of his economic and foreign policy toolkit, leveraging them to drive domestic outcomes and respond to global geopolitical challenges. His renewed focus on tariffs highlights their flexibility as an executive instrument for influencing trade, addressing geopolitical instability and reinforcing US strategic interests.
Tariffs as a policy lever amid geopolitical tensions
President Trump has consistently viewed tariffs as both a trade-balancing mechanism and a way to advance US geopolitical objectives.
Another goal of the administration is to use tariffs as a revenue stream to help offset tax cuts. President Trump's long-standing emphasis on reducing the trade deficit reflects his view that the current global trade system is tilted unfairly against the US. While tariffs on Chinese imports have narrowed the bilateral deficit, overall US trade imbalances persist, now shifting toward other trading partners. Structural issues such as low national savings and persistent federal deficits continue to drive these imbalances.
Mechanisms for imposing tariffs
Trump’s strategy relies heavily on the US president’s broad authority under laws such as the International Emergency Economic Powers Act (IEEPA), which allows tariffs to be implemented swiftly without congressional approval. As of early 2024, the US has 42 active national emergency declarations that can underpin such actions.
Tariffs may also be imposed through:
- Antidumping and countervailing duties, which can reach extreme levels (e.g., over 500% on some Chinese solar panels).
- Section 201 safeguard measures, used to temporarily protect domestic industries.
- Section 232 of the Trade Expansion Act, invoked on national security grounds, as was the case with steel and aluminum in 2018.
- Section 301, employed against "unfair" trade practices, most notably targeting China in Trump’s first term.
Sectoral impact, geopolitical risk and the shifting global supply chain in the world economy
Tariffs are most acutely felt in consumer-facing sectors. Duties of over 30.4% will affect products such as toys, video games and clothing. However, electronics such as phones and computers have been temporarily exempted from the latest round of duties, acknowledging their critical role in both the economy and national security.
Industries such as aerospace, medical diagnostics and televisions that have already diversified supply chains toward US-Mexico-Canada Agreement (USMCA) partners are relatively shielded, demonstrating how geopolitical instability is encouraging regional trade realignment.
Ongoing reviews could expand duties to sectors such as semiconductors, pharmaceuticals, lumber and copper, underscoring the continued impact of geopolitical risk on the global economy.
Reciprocal tariffs and international responses
So far, international responses have been measured but significant, with reciprocal tariffs now affecting US exports:
- China implemented three successive rounds of tariffs, culminating duty on US imports, along with regulatory measures impacting select American businesses.
- Canada introduced tariffs on a range of US goods in response to IEEPA-related measures tied to fentanyl concerns.
- The EU is considering broader tariff actions and has resumed dialogue following the US’ withdrawal of exemptions for steel and aluminum imports.
Tariffs in an era of geopolitical risk
Tariffs remain a key tool for the US to respond to shifting geopolitical realities and economic power dynamics. Under President Trump’s vision, they are as much about advancing national strategic interests as they are about trade. As geopolitical issues, from energy security to technological competition, intensify, the role of tariffs in shaping the global economic outlook is set to expand further, with long-term implications for supply chain resilience and international cooperation.
Economic consequences of higher tariffs amid geopolitical instability
Higher tariffs are expected to generate inflationary pressures and slow economic growth, with distinct variations across regions and nations. In the US, the anticipated rise in inflation may delay the Federal Reserve’s easing cycle, and the tightening of financial conditions is expected to dampen domestic demand. Geopolitical tensions, particularly reciprocal tariffs, and the persistent strength of the real effective US dollar are likely to weigh heavily on US exports, with the combined negative effects surpassing the potential benefits of expected tax cuts.
Globally, sustained geopolitical instability and tightening US financial conditions may prevent other central banks from loosening monetary policies. While Western Europe might experience some exceptions due to its weak economic conditions, the overall environment for international trade is expected to worsen. As a result, global growth projections for 2025 have been revised downward, reflecting the impact of rising tariffs and continued geopolitical risks.
The inflationary effects of tariffs in the global economy
As tariffs increase, inflationary pressures are set to rise, especially in the world’s major economies. These impacts depend on the scale and breadth of tariff hikes, and how much of the cost increase is passed down to the final consumer. Notably, mainland China has been somewhat insulated from these inflationary impacts, though other major economies are likely to see upward revisions in their consumer price inflation forecasts for 2025. While tariffs cause a short-term shift in price levels, they do not necessarily lead to permanent inflationary trends, unless expectations become unanchored, in which case stricter monetary policies could follow.
Tariffs as a revenue source amid geopolitical tensions
Although President Trump has contended that higher tariffs could finance tax cuts and infrastructure initiatives, tariffs have represented a declining share of government revenue, especially in high-income countries, where trade agreements and diversified tax bases have become more prominent. For example, US customs duties were projected to comprise less than 2% of federal receipts in 2024, highlighting their diminishing relevance within the broader fiscal landscape as 2025 advances.
Impact of geopolitical risk on the US dollar
Tariffs typically lead to higher import costs, which can drive inflation and push up interest rates, ultimately resulting in a stronger US dollar. However, with the US dollar at its strongest level since the mid-1980s, and US growth prospects deteriorating, the dollar has weakened. Over the medium term, we expect a gradual depreciation of the US dollar as geopolitical risks and global economic shifts impact growth and interest rate differentials.
Geopolitical dynamics: Canada and Mexico’s responses to tariffs
Canada and Mexico’s responses to US tariffs have evolved in line with changing geopolitical tensions. Initially, both countries aligned with the US on certain issues, such as reducing fentanyl flows, but they have since adopted differing strategies in the face of US tariffs. Canada introduced trade measures in response to foreign tariffs, while Mexico adopted a more conciliatory stance. The future of the USMCA renegotiation remains uncertain, with Mexico’s GDP growth for 2025 projected to fall by 0.2%, largely due to the imposition of tariffs.
Geopolitical effects on the EU
In response to the escalating US tariffs, the European Commission is likely to push for a negotiated resolution. Exemptions for EU exports in exchange for concessions on US imports, such as automobiles and agricultural products, could provide some relief. However, geopolitical tensions may lead to trade measures, including tariffs on US goods, and a more assertive approach toward US tech firms. These moves reflect broader geopolitical issues impacting the global trade landscape and the EU's position in managing these risks.
Global impacts of geopolitical tariffs across regions
The US tariffs primarily target nations with significant trade surpluses with the US, particularly in Asia. These countries are expected to seek exemptions or pursue alternative strategies to mitigate the impact. In Latin America, Mexico remains largely exempt, but Venezuela and other countries may face significant tariffs. The Middle East and North Africa (MENA) region is expected to experience moderate direct impacts. However, indirect effects, especially on dollar-pegged economies, could harm growth prospects and fuel inflation.
The impact of US tariffs on sub-Saharan Africa is expected to be modest, though countries like South Africa, which have trade surpluses with the US, may face adverse effects.
Navigating geopolitical risk: corporate strategies to mitigate tariffs
Corporate concerns about tariffs have surged, with many companies reevaluating their sourcing and pricing strategies to adapt to the new geopolitical landscape. Strategies to mitigate tariff impacts include lobbying, negotiating with suppliers, adjusting sourcing methods and pulling forward orders. The challenge is particularly acute for companies dealing with seasonal or perishable goods, as the phased implementation of tariffs complicates supply chain decisions.
Inflation outlook amid rising geopolitical risk: Key global trends in 2025
As the impact of geopolitics in the world economy becomes more pronounced, national inflation trajectories are reflecting the effects of geopolitical tensions and policy shifts. While consumer price inflation rates are generally expected to align with central bank targets over the medium term, geopolitical instability, including the resurgence of trade disputes and the imposition of new tariffs, is contributing to a renewed set of near-term inflationary pressures.
Inflation downtrend slows under geopolitical pressure
Although inflation has declined considerably from the COVID-19 pandemic-driven highs of 2021–2022, current national forecasts reflect significant variation. These disparities are influenced by country-specific factors such as labor market dynamics, demand conditions, economic resilience to shocks and the composition of consumer baskets.
Changes in trade policy have prompted upward revisions to inflation projections in several major economies. The introduction of higher tariffs, a direct outcome of intensifying geopolitical issues, is contributing to this shift. However, mainland China remains an exception, with ongoing disinflationary trends suggesting more subdued domestic demand.
Core inflation and geopolitical effects on the economy
Core inflation, excluding volatile food and energy components, continues to influence monetary policy decisions globally. While significantly below peak levels seen during the pandemic, core inflation in many advanced economies remains above central bank targets, primarily due to persistent price pressures in the services sector.
The two major components of core inflation — goods and services — are following different trajectories. Core goods inflation, highly responsive to commodity prices and supply chain conditions, had dipped below zero across the G5 economies (US, Canada, eurozone, UK and Japan) through late 2024. However, with global supply chains stabilizing and geopolitical risks, such as rising tariffs, reemerging, inflation in core goods is beginning to increase once again.
Meanwhile, services inflation, which tends to be driven by domestic labor markets and wage growth, remains elevated. In early 2025, services inflation in the G5 declined to 3.8%, the lowest in nearly three years, yet still significantly above historical norms. This stickiness in services prices is likely to prolong higher overall core inflation, complicating efforts by central banks to initiate policy easing.
Long-term inflation influenced by geopolitical tensions
Looking ahead, the longer-term path of core inflation will hinge on multiple factors, including spare economic capacity, labor cost dynamics, corporate pricing behavior and public inflation expectations. Geopolitical effects on the economy, such as shifts in global alliances, trade fragmentation and strategic competition among major powers, will continue to influence these economic fundamentals.
As geopolitical instability becomes a structural feature of the global economic environment, the inflation outlook will increasingly be shaped by internal market dynamics and the broader geopolitical issues redefining the global order.
Global food security
As the world grapples with ensuring food security for all, insights from diverse regions shed light on the multifaceted nature of the challenge and the strategies being employed to address it. Africa needs about US$1.3 trillion annually until 2030 to meet sustainable development goals. At this stage, a lot of the money is coming from governments, but with ongoing fiscal consolidation, the private sector will have to get involved.
Across regions such as Asia-Pacific, Latin America and sub-Saharan Africa, higher food prices have led to a notable uptick in overall inflation rates. In Asia-Pacific, food inflation has surged, driving consumer price inflation close to the upper limit of central bank targets. Similarly, Latin America has seen significant improvements in inflation rates, albeit with some exceptions: Argentina and Venezuela, for instance, are facing triple-digit inflation. Meanwhile, in sub-Saharan Africa, inflation remains vulnerable to global food price fluctuations and disruptions in the food supply chain, compounded by factors such as the pandemic and geopolitical conflicts.
The repercussions of food security on the workforce and jobs are profound. In regions such as Asia-Pacific and sub-Saharan Africa, where a significant portion of the labor force is engaged in agriculture, lower food output and higher prices can directly affect livelihoods and income levels. In India, for example, farmers' protests highlight the discontent arising from reduced agricultural output and increased indebtedness. Similarly, in Latin America, while the agricultural sector presents opportunities for employment growth, climate disruptions and labor unrest pose challenges to stability.
The link between food security and social unrest is evident across regions. In Latin America, protests often target profitable economic sectors, disrupting supply chains and impacting government stability. In Asia-Pacific, cost-of-living concerns fuel demonstrations, particularly in countries such as India, where farmers demand higher minimum prices for agricultural commodities. Likewise, in sub-Saharan Africa, political instability and conflicts exacerbate food security challenges, leading to humanitarian crises and economic setbacks.
Governments have implemented various strategies to address food security concerns. In Asia-Pacific, measures include strengthening buffer stocks, price controls and subsidies to mitigate the impact of higher food prices on consumers. Latin American countries have pursued policies to stabilize inflation rates, including interest rate adjustments and partnerships with the private sector to enhance agricultural productivity. In sub-Saharan Africa, governments are investing in agricultural research, social safety nets and regional trade agreements to bolster food security efforts.
Collaboration and innovation remain key as governments navigate the complexities of ensuring food security. Disparities in resources, infrastructure and governance require tailored approaches to address each region’s specific challenges. By leveraging partnerships between governments, businesses and civil society, the world can move closer to achieving sustainable and equitable food systems for all.
Geopolitical risk and its impact on financial markets, exchange rates and monetary policy
Geopolitical instability continues to exert significant influence on global financial markets and exchange rates, amplifying existing uncertainties and contributing to heightened volatility. The impact of geopolitics in the world economy is particularly evident in the reaction of equity markets and fixed-income yields to trade-related developments and shifting policy expectations.
Market turbulence amid geopolitical tensions
The escalation of geopolitical tensions, notably through the announcement of reciprocal tariffs on April 2, triggered a widespread sell-off in equity markets. While markets briefly rebounded following a 90-day pause announcement on April 9, overall sentiment has remained fragile. Elevated risk aversion persists, as seen in measures such as the CBOE Volatility Index (VIX), which reflects ongoing investor concern about the unpredictable policy landscape.
Rather than easing, US Treasury yields surged unexpectedly in the aftermath of the tariff announcements. The yield on 10-year Treasurys rose approximately 50 basis points within a week, momentarily surpassing 4.5%, defying typical patterns observed during periods of rising recession fears and increased risk aversion. While the temporary suspension of some tariffs, excluding those on mainland China, eased some of the upward pressure on yields, broader geopolitical risk has raised questions over future foreign demand for US government debt.
Shifting global capital flows and sovereign debt exposure
As of January 2025, foreign entities hold close to US$8.5 trillion in US Treasurys, representing nearly 30% of the total federal debt held by the public. Japan, mainland China and the UK account for the largest shares. Notably, China’s holdings have declined significantly, from over 28% in 2011 to just 8.9%, reflecting geopolitical issues and changing strategic priorities.
US trade policy developments have also disrupted capital markets, widening credit spreads and constraining access to funding for lower-rated borrowers. Between late March and mid-April, the average spread on the ICE BofA High Yield Emerging Markets Index expanded by nearly 1 percentage point, highlighting the tightening of financial conditions linked to geopolitical effects on the economy.
Interest rate outlook and currency market impacts
Given the expected rising inflation in the coming quarters, the Fed is projected to remain cautious on rate cuts in 2025. The base case anticipates a single 25-basis-point reduction in December. While futures markets have priced in about 80 basis points of rate cuts for the year, down from earlier expectations of more than 100 basis points, geopolitical instability and its economic implications are likely to shape further monetary policy decisions.
In contrast, Western European central banks are expected to proceed with rate cuts more rapidly than the Fed, driven by different inflation dynamics and economic conditions. This divergence in monetary policy is expected to influence currency movements, moderating recent appreciations against the US dollar. The Japanese yen is forecast to strengthen further due to the relative stance of the Bank of Japan compared to its Western counterparts.
Eye of the tiger-Asia's ambition for 400 Bcm of natural gas in power by 2035
Accelerating Power Demand in Asia Amid Geopolitical Uncertainty
Asia is emerging as a global leader in power consumption growth, underpinned by rapid industrialization, urban expansion, and sustained economic development. Asia’s Ambition for 400 Bcm of Natural Gas in Power by 2035 offers an analysis of how Asia is positioning natural gas at the center of its evolving power strategy. With the region facing rapid economic development, rising urbanization, and growing energy needs, natural gas is emerging as a critical transitional fuel to support grid stability and decarbonization efforts.
Home to over 60% of the global population, Asia currently accounts for around 52% of worldwide electricity demand. This is expected to increase by more than 40% by 2035, led primarily by Mainland China—which makes up nearly two-thirds of Asia’s power consumption—and supported by significant growth in India and Southeast Asia.
Gas demand in the power sector is projected to rise from 280 billion cubic meters (Bcm) in 2024 to approximately 368 Bcm in 2035, representing a 32% increase. Southeast Asia is poised to drive much of this growth, while more mature markets such as Japan, South Korea, and Taiwan may see a slight decline due to energy policy shifts and slower demand growth.
Natural gas plays a vital role in Asia’s strategy to transition away from high-emissions fuels. As solar and wind energy gain momentum—particularly in China, where they are expected to dominate the power mix by 2035—gas-fired generation will be essential for providing flexibility and maintaining grid reliability, especially during peak loads and weather-related disruptions.
This also identifies key upside factors that could drive demand beyond current forecasts. These include stronger-than-expected economic growth in emerging economies such as Vietnam and India, which are projected to maintain GDP growth above 5% annually through 2035. Additionally, the rapid proliferation of power-hungry data centers could further elevate regional electricity needs.
However, geopolitical instability and broader geopolitical effects on the economy pose notable uncertainties. The direction of energy policy, combined with geopolitical tensions—particularly those influencing trade, energy security, and cross-border infrastructure investment—may significantly impact Asia’s energy trajectory. Geopolitical risk in the region, including shifts in global trade alliances and regulatory frameworks, could accelerate or delay investments in gas infrastructure.
Downside risks include increased competition from cheaper coal, delays in gas infrastructure projects, and faster-than-anticipated expansion of renewables. A potential downside of 69 Bcm in gas demand by 2035 is identified under scenarios where coal remains competitive or policy incentives favor accelerated renewable adoption, particularly considering geopolitical issues like trade tariffs on solar technologies.
Despite these headwinds, the base-case scenario still anticipates robust gas demand growth, reaching over 378 Bcm by 2035. Realizing Asia’s ambition to exceed 400 Bcm in natural gas consumption for power will require continued infrastructure investment, long-term policy support, and the ability to navigate geopolitical instability and the evolving global economic landscape.
In summary, Asia’s energy future hinges on balancing its growing power needs with environmental goals and navigating the impact of geopolitics in the world economy. Natural gas remains a strategic component of this equation—crucial for enabling a flexible, cleaner energy system amid rising demand and shifting geopolitical dynamics.
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Eye of the tiger, Asia's ambition for 400 Bcm of natural gas in power by 2035
Green Rules scenario
S&P Global Commodity Insights’ Green Rules scenario portrays a world in which leaders and governments in key markets are compelled to take momentous steps to address threats to energy, public health, economic well-being and climate security. The impetus behind this is a mix of fear, exasperation and political backlash by the public (citizens, voters, consumers), who are demanding action from their leaders in response to the seemingly endless crises of the early 2020s. The desire for constructive change is particularly strong considering the acute geopolitical threat posed by the war in Ukraine and the economic impact of yet another instance of energy (first oil, then natural gas) being used as a geopolitical “weapon.”
In the Green Rules scenario, it is not newfound altruism but a fundamental self-interest in improving global stability and national security that drives action. This is directly linked to reducing dependence on fossil fuels and volatile energy commodity markets while rejuvenating national economies to compete in a clean-technology-driven global economy. Ongoing concerns over climate change and ambitions to mitigate it remain strong and are supported, even supercharged, by these new political and economic forces. The result is a world where a revolutionary change in energy use, supply and emissions takes place.