On April 17, 2025, at 10 a.m., in Washington DC, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), delivered a sobering update on the global economy amid escalating trade tensions. Opening her remarks, Georgieva reflected on a speech delivered six months prior at the same podium, in which she warned of the persistent low growth–high debt dilemma facing the global economy, particularly among emerging markets and developing economies. At the time, she acknowledged vulnerabilities but praised the resilience shown by countries that weathered successive shocks through sound economic fundamentals and nimble policy responses.
Fast forward six months, that resilience is once again being tested—this time by a fundamental recalibration of the global trading system. Financial market volatility has intensified, and trade policy uncertainty has reached unprecedented levels. Georgieva’s overarching message was clear: the global economy is navigating an era of abrupt and sweeping change, and policy responses must be carefully calibrated. She emphasised that “a better balanced, more resilient world economy is within reach”—but achieving it will require collective action and trust.
Georgieva acknowledged that today’s trade tensions did not emerge overnight but have been simmering for years, now boiling over. In a candid moment, she pointed to the erosion of trust—both in multilateral institutions and between countries—as a central force undermining the global economic order. While globalisation has lifted millions out of poverty—especially in countries like India, China, and much of Africa—its benefits have not been evenly distributed. Globalisation, she conceded, has produced both winners and losers, and thus failed to meet the standard of Pareto Optimality, where gains from trade are distributed in a way that leaves no one worse off.
A confluence of forces—offshoring, automation, and the increasing multilateralisation of companies—has hollowed out industrial communities in advanced economies. Wages have stagnated or been repressed amid a global race to the bottom for labour costs. Meanwhile, supply chain disruptions, exacerbated by geopolitical shocks like the Russia–Ukraine conflict, have driven up consumer prices far from the crisis zones. These pressures, compounded by vaccine hoarding during the COVID-19 pandemic, have deepened public discontent—culminating in political flashpoints such as the one witnessed on April 2, 2025 when Trump announced his new tariff regime.
Georgieva pointed to the proliferation of non-tariff barriers, such as domestic subsidies, which distort competition and further erode trust in the multilateral system. The perception that some countries abide by international trade rules while others blatantly disregard them has only deepened frustration among “trade losers”. In this increasingly multipolar world, national security concerns now shape economic policy more explicitly—particularly in the United States, where strategic industries like semiconductors and steel are being reshored at any cost. For the Trump administration, the argument is straightforward: some goods must be made in America, regardless of the price.
So, what does this mean for the global economy—and more specifically, for small island developing states in the Caribbean?
The unfolding trade war serves as a poignant reminder of the African proverb: “When elephants fight, it is the grass that suffers.” Preliminary data show that US tariff rates have surged to levels unseen in recent years. While large economies like the US, China, and the EU can absorb the shocks due to the sheer scale of their domestic markets, their trade actions have ripple effects. Their import volumes may be relatively small as a share of GDP, but as the world’s largest consumers, any shift in policy impacts global prices and supply chains. For highly trade-dependent Caribbean economies, these disruptions carry disproportionate consequences.
Adding to the challenge is the shrinking pool of Official Development Assistance. As Europe diverts resources toward defence spending, and the US realigns foreign aid priorities—amid Trump-era influences such as the Department of Government Efficiency and the political weight of figures like Elon Musk—small states are left with fewer buffers to absorb external shocks.
The IMF outlines three key transmission channels through which trade tensions are affecting the global economy:
- Heightened Uncertainty: Fragmented and volatile trade environments increase the complexity of global supply chains. Information asymmetries and inconsistent tariff regimes across borders raise transaction costs and ultimately inflate prices.
- Growth Suppression: Tariffs act as taxes that dampen aggregate demand and delay investment decisions. The burden is shared between firms—who face reduced profits—and consumers, who pay more at the checkout.
- Long-Term Productivity Losses: Protectionism, by insulating firms from international competition, stifles innovation and reduces efficiency. Over time, this results in poorer-quality goods, fewer consumer choices, and weaker economic dynamism.
Reflecting these risks, the IMF’s forthcoming April 2025 World Economic Outlook—scheduled for release on April 22—will reveal a notable downward revision to global growth forecasts.
However, the Fund has not yet declared a recession, noting that further data is needed to confirm a systemic downturn.
So, what should Caribbean countries do?
The Fund urges governments to redouble their efforts to restore fiscal discipline and rebuild policy space. This is no easy task, especially with several Caribbean nations preparing for elections in 2025. Fiscal austerity is politically unpopular, and few administrations are willing to tighten belts while campaigning for another term.
Nonetheless, the IMF’s message remains consistent: reduce public debt, implement credible and gradual fiscal adjustment plans, and create the space needed to protect vulnerable populations in times of crisis. The Fund warns that rising tariffs and persistent trade policy uncertainty will lead to higher consumer prices—making social protection policies more important than ever. But these protections can only be afforded if countries maintain adequate fiscal buffers.
Anticipating possible debt distress in economies with elevated debt levels, the IMF has signalled that the Global Sovereign Debt Roundtable will soon release a playbook for debt restructuring. This initiative is intended to provide guidance to countries facing trade war-induced financial pressures and in need of a coordinated and transparent pathway to debt sustainability.
In a world increasingly defined by strategic rivalry and economic fragmentation, small states must navigate carefully. The message from the IMF is clear: resilience is still possible, but only through prudent fiscal management, multilateral cooperation, and a collective commitment to restoring trust in the global economic system.
