Eastern Asia and Southern Asia. It also ranks first in three out of the four country income groups, with the only exception being lower-middle income countries. Respondents in 25 countries see Economic downturn as the leading risk, including developed economies such as the United States and United Kingdom, and emerging markets such as Brazil, Kenya and Malaysia (Figure 1.19). In the short term, higher import tariffs cause an increase in the price of imported goods. The impact on global GDP depends on factors including the substitutability between imported and domestic goods; the response of exporting firms facing tariffs; and monetary policy reactions.36 When it comes to the latter, monetary policy-makers are in the fortunate position of having just brought inflation back under control. The International Monetary Fund (IMF) projects headline global inflation to fall to 3.5% by the end of 2025, which is lower than the average in the two decades prior to the COVID-19 pandemic.37 However, one risk is that an escalating trade war will lead to another upturn in inflation, forcing central banks to halt or even reverse course from cutting interest rates. If this is associated with a strengthening US dollar, there could be knock-on risks for countries and companies with US dollar debt refinancing needs. Indirect impacts of tariffs include a fall in productivity, due to a change in the allocation of productive resources from more to less productive, more protected sectors and firms; a rise in the cost of capital caused by financial stress; and a drop in investment due to an increase in uncertainty about future business conditions, which causes firms to adopt a “wait-and-see” approach.38 The latest World Investment Report, released in June 2024, cites fragmenting trade and regulatory environments as among the key drivers of a 10% slump in global foreign direct investment last year.39 Analysis by the World Trade Organization (WTO) of the phase of the US-China trade conflict from 2018-2020 indicates that the direct impacts on the global economy of tariff increases during this period were far outweighed by the impacts of broader uncertainty around trade policy. With these broader impacts, the loss to global GDP was estimated at 0.34-0.50% during this period.40 A true global trade war would have correspondingly more severe impacts, with estimates of global GDP losses highly uncertain but potentially much higher.41 The US-China trade conflict since 2018 also had clear business impacts: exits of foreign companies from China increased by 34% compared to pre- 2018 levels.42 Importantly, the impacts were much broader than only in the specific sectors targeted by US tariffs on Chinese products and affected non- US companies as well as US companies. These findings suggest that even the “scalpel” approach – levying tariffs on specific sectors – does not have a well-targeted outcome in terms of either sector or geography.43 To reiterate, a broader global trade war would magnify these impacts on businesses. Actions for today A. Foster multilateralism The GRPS finds that the approach that has the most long-term potential for driving action on risk reduction and preparedness regarding Geoeconomic confrontation is Global treaties and agreements (Figure 1.20). A specific area to prioritize would be Risk Governance: Geoeconomic confrontation FIGURE 1.20 Source Source: World Economic Forum Global Risks Perception Survey 2024-2025.“Which approach(es) do you expect to have the most potential for driving action on risk reduction and preparedness over the next 10 years? Select up to three for each risk.” Risk categories Economic Environmental Geopolitical Societal Technological Geoeconomic confrontation (sanctions, tariffs, investment screening)Share of respondentsApproach a. Financial instruments b. National and local regulations c. Minilateral treaties and agreements d. Global treaties and agreements e. Development assistance f. Corporate strategies g. Research & development h. Public awareness and education i. Multistakeholder engagement Global Risks Report 2025 32