LJust over 48 hours passed last week between IMF chief Kristalina Georgieva’s warning that “uncertainty is the new normal” and Donald Trump’s latest tariff attack – this time directed at China.
Markets plunged Friday after Trump threatened to impose additional punitive 100% tariffs on Chinese goods in retaliation for Beijing’s blockades on exports of rare earth minerals.
Finance ministers and central bankers from around the world will gather in Washington this week for the annual meetings of the IMF and World Bank.
In her opening speech to the meeting, Georgieva rightly pointed out that the global economy had proven more resilient than some feared during the spring meetings in April, when policymakers around the world were stunned by the chaos emanating from the White House.
Part of the reason for this is “front-loading”: Trump’s intention to raise tariffs was no secret, and many companies built up their inventories in advance and began to reorganize their supply chains.
Another explanation is that America’s trading partners have generally preferred to resort to a combination of flattery and capitulation in the face of Trump’s approach, rather than provoking an all-out trade war.
Meanwhile, businesses and governments are increasingly forming new trade relationships that bypass the United States, creating what Adam Posen, director of the Washington-based Peterson Institute for International Economics, called a “new economic geography.”
The latest update from UNCTAD, the trade and development arm of the UN, was proof of this.
“Trade growth remained positive in the first half of 2025, despite growing trade policy uncertainty, ongoing geopolitical tensions and a challenging global economic environment,” UNCTAD reported.
Far from stopping, global trade grew by more than $500 billion (£375 billion) in the first half of the year and is expected to continue growing in the third quarter, with much of that momentum coming from developing countries.
Adding to the sense of shifting tectonic plates, UNCTAD highlighted the continued prevalence of “friendshoring” – the phrase coined by former Federal Reserve Governor Janet Yellen to describe trade with trusted geopolitical allies.
The impact of the tariffs on the U.S. economy also appears to have been less dramatic than initially feared — although, with policy changes continuing over the weeks, U.S. consumers likely have yet to fully feel their effects.
Yet Friday’s fury came as a reminder that, as Georgieva argued, there are still reasons to be afraid — or as she put it: “Global resilience has not yet been fully tested. And there are worrying signs that the test may be coming.”
As the new conflict with China shows, Trump continues to use tariffs as a weapon, creating new shocks in financial markets. The impact has been particularly harsh in developing countries, some of which, as UNCTAD has pointed out, face some of the highest tariffs.
Outside of trade policy, the White House continues to pursue unfunded tax cuts and trash economic institutions usually considered cornerstones of credibility – including the Federal Reserve.
Over time, this is sure to undermine market confidence, including in US Treasuries (government bonds) – an important benchmark against which assets in global markets are valued. There are still few signs of this; but once lost, economic credibility is difficult to rebuild.
Part of the reason markets have not reacted more chillingly to this and other concerns is that the economic situation is flattered by another extraordinary and unpredictable phenomenon: the AI boom.
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This is another reason for concern. A wall of funding continues to pour into the tech industry as investors bet on the future of generative AI and race to build the massive data centers needed to train and run the models.
World Trade Organization data showed last week that 20% of the growth in global trade in goods in the first half was attributable to “AI-related goods – including semiconductors, servers and telecommunications equipment”, much of which came from Asia to the United States.
As Ben May of Oxford Economics recently said: “Increasing capital spending in the United States to develop AI capabilities masks weakness in other parts of the domestic economy. »
However, a growing number of observers are beginning to worry that generative AI may not generate the extraordinary gains that would justify the valuations of technology companies on Wall Street.
And the increasingly complex web of cross-shareholdings between some of the major companies involved has raised eyebrows.
The Bank of England last week became the latest body to warn of the risk of a “sudden correction” in global markets if the AI boom reverses.
“On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence. This… leaves equity markets particularly exposed if expectations about the impact of AI become less optimistic,” he said.
Georgieva echoed this caution, comparing the AI boom to the dot-com bubble at the turn of the millennium. “Current valuations are heading towards the levels we observed during the bullish period around the Internet 25 years ago,” she warned, raising the specter of a “strong correction”.
The dollar and dollar-denominated assets remain the lifeblood of much of global finance, despite efforts since the financial crisis to increase the importance of other currencies – so an AI crash would have global repercussions.
It is perhaps fitting that Trump has unleashed a new round of destabilizing threats just as policymakers are coming to town to take the temperature of the global economy. It certainly made them understand Georgieva’s central message: “Fasten your seat belt.”
