Two economists believe the Trump tariffs will have a deep impact on the global economy but a third says other factors will have to come into play to push it to the brink.
TKS Yugendran from Bait Al-Amanah and Nazari Ismail of Universiti Malaya rate the risk of such an outcome at the global level as “very high” but Nazari’s colleague Goh Lim Thye believes it will come to pass only if tension builds up.
Yugendran said the tariffs will raise costs for the average American, leading to a drop in disposable income.
“This raises the possibility of a drop in consumer and business confidence. This will trigger a recession (in the US) that will eventually spread across the globe,” he told FMT Business.
“The US is just hurting itself with the tariffs,” he said, noting that financial institutions such as JP Morgan and Goldman Sachs shared the same sentiment.
Both institutions have warned that a recession is likely and that it will spill over globally because of the interconnected nature of the US economy.
Yugendran said even emerging economic powers like China and India do not have the capacity to fully offset the impact of a US recession for now.
“This is because the US is still the dominant financial hub of the world and the dollar is still a dominant reserve currency,” he added.
Malaysia is one of 49 countries on the latest list of US trading partners that will be hit with the new tariffs. Among Asean countries, Vietnam will see an additional 46% levy on its exports to the US, making it the worst hit country in the region. The rate for Malaysia is 24%.
Nazari, who is in the faculty of business and economics at Universiti Malaya, pointed out that US household debt has already reached US$18 trillion.
“The new tariffs will raise costs for consumers and reduce consumer spending. This will give rise to a recession,” he told FMT Business.
There is also a strong likelihood that the recession will spread across the globe as well, and Malaysia will not be spared, he added.
Nazari pointed out that several other factors also contribute to the risk of a recession.
“The US is nursing a persistent trade deficit as a result of the greenback’s position as the world’s de facto reserve currency. This enables the US to borrow and import extensively, without the fear of its currency depreciating,” he said.
“On the other hand, other countries cannot do the same given that their currencies will weaken against the dollar, making their debt too big to pay,” he added.
He said reliance on a debt-based financial system that encourages excessive borrowing and debt-driven growth, resulting in high cost of production, is a structural weakness of the US economy.
“Government, businesses, and consumers borrow heavily, mainly from the US financial sector and foreign central banks through the sale of US treasuries to finance consumption, especially imports,” he said.
At US$36 trillion, the federal debt is double the size of the household debt. Nazari said Trump had ignored these factors when he imposed the tariffs.
On the other hand Goh, who is in the same faculty as Nazari, is less pessimistic. While he does not rule out the possibility of a global recession, he said such an outcome would hang on many factors, one of which is the disruption of the global supply chain brought on by a broader trade war.
He said such a disruption may become a possibility if the affected countries respond to the new tariffs with retaliatory measures.
“This will reduce trade flows, raise production costs and weaken investor confidence,” he told FMT Business.
“If the tension spreads towards the major economies, the risk of a global recession becomes more pronounced, but monetary and fiscal interventions by central banks and governments can help cushion the blow,” he added.
He agreed that a proposal by the investment, trade and industry ministry to push for market diversification through regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a good option.
“As access to the US market becomes more restrictive, Malaysia can redirect exports to partner countries with preferential trade arrangements,” he said.
“These agreements offer improved market access, reduced tariff barriers, and regulatory cooperation, allowing Malaysia to maintain export competitiveness and reduce overreliance on any single market,” he added.