Global Economy in Turmoil: Prevent Free Trade System from Going Adrift / Risks to Financial Markets Must Be Heeded

Editorial

17:40 JST, January 4, 2026

The United States has always been the lead player in creating the order that has underpinned global economic prosperity. The current situation is that the country is now, after 80 years since the end of World War II, about to relinquish that role.

To prevent any further turmoil, Japan should take the lead and keep the free trade system from going adrift.

Toward steady growth of 2.9%

Free trade and the dollar-based currency system were the foundations of global economic development. The goal was that each nation would produce goods in its areas of strength, and by boosting imports and exports, countries both large and small could build mutually beneficial relationships.

However, this ideal has caused regret in the United States. The country’s president, Donald Trump, is driven by an intense sense of victimhood.

He claims that the United States has been exploited by China and other countries under the globalization promoted by the World Trade Organization, resulting in job losses and the decline of the domestic manufacturing industry — a narrative that resonates with many Americans.

This is probably why Trump believes unilaterally imposing high tariffs is perfectly legitimate. His second administration has stunned the world with far more aggressive methods than those employed in his first term.

Nevertheless, Japan and the European Union, among others, deserve credit for persistently negotiating with the United States to lower tariffs and mitigate the impact.

Despite lingering effects from the duties, the global economy remains resilient for now. The Organization for Economic Cooperation and Development forecasts that the real growth rate for the global economy is estimated at 2.9% this year, down 0.3 percentage points from last year.

The United States is expected to grow by 1.7%, while the rate for the eurozone, including Germany and France, is forecast to be 1.2%. However, there is no end in sight for China’s real estate downturn. The country’s growth rate is estimated to fall by 0.6 percentage points to 4.4%, according to the OECD projections.

Trump faced China head-on through a trade war and then realized its strength and opted for a temporary truce. Yet his words and actions remain unpredictable. The U.S. Supreme Court may rule that his tariffs are illegal. The shadow of uncertainty that lies over the world shows no sign of lifting anytime soon.

CPTPP’s growing magnetism

The United States is not the only country where there are growing doubts about globalization. Employment is becoming unstable, and populism is on the rise in countries around the world.

Which goods should be produced domestically, and which imported? This is no longer an era where production networks can be built solely on the merits of efficiency or low cost. New forms of free trade must be explored to ensure that this leads to peace of mind for the lives of people.

Due to its role in safeguarding free trade, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is growing more magnetic.

The pact is extremely progressive on trade liberalization, and almost entirely eliminates tariffs among trade partners. Led by Japan, it has evolved into a massive trade bloc involving 12 countries, including Australia, Britain and Vietnam.

Costa Rica, Uruguay, Indonesia, the Philippines and the United Arab Emirates, among others, have expressed interest in joining the pact.

Many countries are weary both of the United States’ high tariffs and of China’s economic coercion, as well as its self-serving habit of channeling excess production into exports.

The CPTPP, which has attracted nations at different stages of development and from diverse regions, can serve as a bulwark for free trade. Hopefully, Japan will take the lead in enlarging its membership.

It is crucial to strengthen cooperation with the EU, which shares similar values. Enlarging the CPTPP could help deter China. It might also cause the United States to reconsider its stance.

Though the United States has turned its back on the international order, the Japan-U.S. alliance remains as important as ever, given the severe security environment. It is vital to advance projects that are conducive to strengthening this relationship.

Japan should steadily advance the $550 billion (about ¥86 trillion) investment in the United States agreed upon in tariff negotiations, in a manner beneficial to Japan’s national interests. There should be many fields where mutually beneficial relationships can be built, such as liquefied natural gas, nuclear power generation, semiconductors, rare earths and shipbuilding.

Heavy burden for new Fed chair

The stability of international financial markets will depend on the helmsmanship of the next chair of the U.S. Federal Reserve Board.

Trump has continued to pressure the Fed to cut interest rates, as he wants to stimulate the economy. If the new chair, expected to take office in May, moves to quickly lower rates, it could reignite inflation. Disruptions to currency markets and other areas could have serious negative consequences.

Caution is also needed when it comes to the U.S. stock market, which is showing signs of overheating.

Expectations for AI-driven growth continue to rise. Funding is pouring into IT companies from around the world, raising concerns about an AI bubble.

Data center construction is accelerating, and the market capitalization of semiconductor giant Nvidia Corp. at one point exceeded $5 trillion, surpassing Japan’s gross domestic product.

If the bubble bursts, the impact would be immeasurable. It is important to thoroughly prepare, such as with financial safety nets.

(From The Yomiuri Shimbun, Jan. 4, 2026)