[Insight & Opinion] Catastrophe Theory and Economic Crisis

"Trump Recession" Has Yet to Occur
The Tipping Point for Change May Be Approaching

One of the most surprising things that happened last year was, in fact, something that did not happen. The economic crisis that was expected to result from Trump's tariff war-the so-called "Trump recession"-never materialized. Warnings that the Trump administration's aggressive tariffs would trigger a surge in inflation and a global economic downturn ultimately did not come to pass.

In April of last year, when the United States announced its unilateral protectionist policy, financial markets plummeted, and the Volatility Index (VIX), which reflects stock investors' anxiety, soared to its highest level. This was not unexpected: tariffs are, after all, a direct burden on importers, increase production costs, and drive up prices. It seemed inevitable that such measures would deal a fatal blow to the real economy.

However, even after the average U.S. tariff rate soared from below 3% at the end of 2024 to nearly 17%-the highest level since 1935-the U.S. economy continued to grow rapidly. At least according to the indicators, the U.S. economy shows no signs of trouble. In the third quarter of last year, the gross domestic product (GDP) posted an annualized growth rate of 4.3% compared to the previous quarter, and as of December, the consumer price index (CPI) stood at around 2.7%. The growth rate was the highest in two years since the third quarter of 2023 (4.7%), and inflation came in below forecasts. There are explanations for this. First, Trump's tariff policy did not ultimately reach the levels initially announced.

At one point, Trump declared he would impose a blanket 50% tariff on all trading partners, but in practice, he gradually delayed implementation, reached agreements in exchange for certain concessions, and then lowered tariffs. This was partly because the original plan was unrealistic, but also because U.S. trading partners chose negotiation over retaliation.

In fact, China was virtually the only country to take retaliatory measures against Trump's tariffs. Companies absorbed more of the tariff burden themselves than expected. Stockpiling inventory before tariffs took effect and diversifying import sources likely helped as well. Artificial intelligence may also be playing a role. While the impact of AI on productivity remains largely speculative, it is clear that the current vitality of the global economy is fueled by investment concentrated in AI.

However, just because there was no crisis does not mean the possibility of crisis has disappeared. It is possible that the full effects of the tariffs have yet to manifest in the market. Most professional research institutions forecast that the global economy will maintain a similar growth trajectory this year as it did last year.

But there are too many variables. The direction of AI evolution, U.S. tariff policy, and changes in U.S.-China relations are all difficult to predict. Long-standing assumptions about international trade have been discarded, and the world has witnessed the collapse of nearly all economic policy norms in the United States. Risk assessment based on previous patterns is now largely meaningless. Catastrophe theory highlights how even very small changes can suddenly trigger dramatic shifts in circumstances.

Nothing happens until something happens. Even if the causes of change are accumulating, actual change is only observed after a critical threshold is crossed. The liquid in a trembling teacup does not spill until the very moment it suddenly overflows, and an electrical circuit only starts operating after the final component is connected.

This year, many expect that the Korean economy will fare somewhat better than last year, and that the U.S. economy will maintain a stable growth path thanks to expanded investment in artificial intelligence and improved productivity. However, the sharp decline in confidence in U.S. Treasury bonds is a potential threat to global financial markets. Fiscal deficits in major countries, including the United States, have already exceeded sustainable levels. Last year, the markets did not collapse. There was no global trade war, nor was there a recession. There is no guarantee that this will continue in the future.

Kim Sangchul, Economic Commentator