The Economic Consequences of the Second Trump Administration: A Preliminary Assessment

Yves here. Most of you will recognize the headline’s nod to the book that propelled John Maynard Keynes to fame, his The Economic Consequences of the Peace. Keynes, who had been an advisor to the UK Treasury team participating Versailles Conference, which was negotiating what amounted to the detailed terms that would be imposed on Germany after World War I. Keynes had had to return to England while the talks were on due to a bout of bad health, and decided to resign because it was clear to him the the settlement would be unduly punitive. His book, which presciently argued that the attempt to impose a Carthaginian peace would backfire, became a best seller.

Note also that this is a heavyweight group of authors that is iproviding an overview to an e-book with contributions from 50 experts. But even this high-level recap seems a bit cautious. It seems loath to clearly say that Trump”s not-well-thought-out fight to prevent or delay the inevitable shift to a multi-polar order is making the transition more painful, and potentially much more bloody, than it need be.

You can download the e-book here.

By Gary Gensler, Professor of the Practice, Global Economics and Management, and Professor of the Practice, Finance, Sloan School of Management at Massachusetts Institute of Technology; Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, Head of the Global Economics and Management Group and Faculty Chair of the Sloan Fellows Programme at Massachusetts Institute of Technology; Ugo Panizza, Vice President at Centre for Economic Policy Research, Professor of Economics and Pictet Chair at Geneva Graduate Institute; and Beatrice Weder di Mauro,President at Centre for Economic Policy Research, President, Professor of Global Economics, Climate and Nature Finance at Geneva Graduate Institute (iheid), Visiting Professor at Hoffmann Global Institute for Business and Society INSEAD. Originally published at VoxEU

The world is adjusting to President Trump’s second ‘first hundred days’ in office. This column introduces a new CEPR eBook in which over 50 experts explore how the new administration’s policies are reshaping the US economy and sending ripples across the global economic order. While the assessment is preliminary, in part due to the great uncertainties inherent to President Trump’s style of policy development, collectively the contributions suggest that the policies of the new administration are likely to weigh negatively on both the US and global economy in the short and long term.

In a remarkable turn of history, the world is adjusting to President Trump’s second ‘first hundred days’ in office.

In a new CEPR eBook, The Economic Consequences of the Second Trump Administration: A Preliminary Assessment,we assembled over 50 experts to explore how the new administration’s policies are reshaping the US economy and sending ripples across the global economic order (Gensler et al. 2025). This assessment is preliminary given the usual uncertainties of such endeavours, but more importantly, given the great uncertainties inherent to President Trump’s style of policy development. Our goal is to offer this initial assessment and then update it later this year as developments unfold further.

The emerging picture, though, is cause for concern.

While sweeping tariffs, sharp breaks in global alliances, and risks to the rule of law may have garnered the most attention, there has been a flurry of other activity affecting the economy. This has included significant policy shifts on immigration, deportations, birthright citizenship, downsizing government, as well as cuts in science funding, foreign aid, and academic support. Dramatic changes to health programmes and tax policies are working their way through Congress and the administration. The declining US fiscal picture, challenges to international alliances, tariff wars, questions of Federal Reserve independence, and deregulatory financial sector policies also have raised concerns about the sustainability of the global dollar-based system.

Though the US and global capital markets have shown resilience to date, early indicators point to economic turbulence ahead. Investment, inflation, and supply chain risks all have increased. Businesses, financial parties, foreign countries, and the public naturally are assessing what this all means for their economic futures.

The US also is retreating from its historic role in supplying key global public goods – on trade, national security, rule of law, basic research, and the dollar – that have underpinned both domestic and international prosperity for decades. Though the full impact of declining US leadership may take time to unfold – as institutions and economies adjust to a less stable international order – such deep policy shifts are likely to have negative consequences over the medium to longer term.

The new administration has occasionally softened controversial policies in reaction to equity or bond market reactions, such as in April when it delayed reciprocal tariffs for 90 days. The market recovery since then, however, does not necessarily indicate smooth sailing on the horizon.

To the extent that the administration interprets current financial markets as a green light, such interpretation may encourage policies that undermine long-run growth. Over time, the cumulative effect may be a profound weakening of both US economic dynamism and the global system it once led.

The Second ‘First Hundred Days’

Much has changed since President Trump’s first ‘first hundred days’ in 2017. The world has experienced the COVID pandemic, supply chain shocks, wars in Ukraine and Israel, inflation returning to the fore and advancements in artificial intelligence (AI), particularly generative AI. Over those years, though, the US’s dominant economic role has remained relatively consistent.

President Trump’s second administration also has seen important shifts in comparison to his first administration.

First, while there has been heightened policy uncertainty in both administrations, the sheer number and dramatic nature of the policy shifts of the current administration, coupled with its unpredictability, has significantly deepened the uncertainty. By mid-May 2025, President Trump had signed over four times more Executive Orders than he had in the same period in 2017, surpassing even President Franklin Roosevelt’s famed ‘first hundred days’. Further, policy reversals have occurred within days, courts are flooded with litigation challenging new measures, and financial markets are reacting to an unpredictable and reactive governance style.

Second, the President’s penchant for risk, high-stakes negotiation, and public confrontation has become central to his governance style. This includes economic brinkmanship with allies and adversaries alike, signalling a departure from the cautious multilateralism of past administrations. President Trump and his team also came into office this administration with more experience and determination than eight years ago.

Third, the current administration repeatedly is testing presidential boundaries and traditional limits on executive power, including pressing constitutional debates around unitary executive theory, which asserts total presidential control over federal agencies. Possibly most consequential has been the use of authorities not only to affect policy outcomes, but also to influence businesses, academic institutions, law firms, the media, civil society, US states, and foreign leaders. On 12 May 2025, Supreme Court Chief Justice Roberts described the rule of law as “endangered”.

Economic Transformation in the United States

Given all these policy and governing shifts, US business and financial investment may decline. Consumer confidence already has declined, and forecasts of a 2025 recession have grown more likely. Inflation expectations have diverged: model-based projections remain around 3%, but consumer expectations have surged above 7%.

Since the beginning of the administration, due to tariffs – a form of taxes – Americans effectively have seen one of the most significant tax increases in more than a generation. Even factoring in the pause to certain tariffs (including for China), tariffs are up to an average of about 10%, from about 2.3% at the end of the Biden administration. Further, though marketed as a defence of middle-class jobs and manufacturing, tariffs are unlikely to yield the promised benefits in terms of employment and tax revenues.

The outlook for science, immigration, and rural policy is equally troubling. In each case, the administration’s early moves suggest long-term costs to innovation, productivity, and community resilience.

Fiscal policy adds yet another layer of stress. President Trump’s “Big Beautiful Bill”, if enacted, will further widen the US structural fiscal imbalance and unsustainable debt trajectory. On 16 May, Moody’s followed the other major agencies in downgrading the US sovereign credit rating below AAA.

Economic Transformation Around the Globe

For the past eight decades, the US has supplied essential international public goods, not by altruism, but by enlightened self-interest. The post-Cold War world was further defined by the triumph of democracy, the expansion of globalisation, and the consolidation of a rules-based international order anchored in multilateral institutions, open markets, and US leadership.

While the second Trump administration did not originate fractures in this system, it is accelerating and deepening them, including with policies that amount to attacks on the global multilateral order itself.

For instance, the US’s stark unilateral tariffs undermine the principle of non-discrimination, a foundational norm of the WTO and once a pillar of US trade leadership, thereby undermining a core tenet of multilateralism and rules-based global commerce.

In stepping back from its traditional role in providing global public goods, the administration is undermining collective capacity to manage transnational risks and leaving the global commons increasingly exposed.

While this has unsettled most countries, it also is prompting strategic recalibration across advanced economies, particularly in Europe. The war in Ukraine, coupled with President Trump’s threats to withdraw from NATO and impose sweeping tariffs, has left Europe increasingly exposed, both economically and strategically.

The EU, the world’s second-largest economy, has internal weaknesses. As Draghi (2024) and Letta (2024) have argued, Europe is operating below potential with a substantial productivity gap. Europe’s most effective response is to complete its internal market. Lowering intra-EU barriers will enhance economic performance and increase Europe’s geopolitical weight. Paradoxically, if Europe can find the political will, US policies may provide the impetus needed to accelerate EU integration and unlock long-delayed potential. President Trump’s policies make European strategic autonomy essential.

The US’s new policies are forcing Europe to confront its fragmented defence architecture as well. A credible response will require increased common defence spending, faster procurement cycles, and greater alignment with partners. If executed well, such an effort also might catalyse a technological transformation, particularly in strategic sectors like advanced digital infrastructure and AI.

Elsewhere around the globe, China remains the primary interest of President Trump’s trade policies, and one of the few countries to respond with substantial retaliatory tariffs. China is highly competitive in many high-tech sectors and has real economic leverage, as recently demonstrated by China’s restrictions on exports of rare earth minerals and magnets. It faces, however, mounting structural stresses: high debt, surging youth unemployment, and a fragile real estate sector. Mitigating US tariff shocks would require China to shift toward consumption-led growth.

As daunting as US-Canada relations have been, they may have led to a shift in Canada’s political landscape: the Liberal Party gained greater traction under its new leader, Mark Carney. In Japan, it may provide impetus to enact long-overdue agricultural reforms.

Latin America, due to its geographic and economic proximity to the US, is especially exposed to Washington’s trade agenda. Mexico is particularly vulnerable. As the top US trading partner and a linchpin of the North American auto industry, it holds the second-largest bilateral trade surplus with the US. Any tightening of trade conditions is likely to dampen Mexico’s growth.

Beyond trade, deep cuts to foreign aid threaten far-reaching consequences in low-income economies. Proposed reductions in assistance could result in more than 500,000 additional deaths each year, primarily due to increased mortality from diseases like HIV and malaria.

Concluding Assessment

The overall economic picture painted by our assembled experts is troubling. Disruption of the global economic system the US helped build and lead may accelerate the world’s transition toward a more uncertain multipolar economic order. Collectively, The Economic Consequences of the Second Trump Administration: A Preliminary Assessment suggests that the policies of the new Administration are likely to weigh negatively on both the US and global economy in the short and long term.