Uncertainty surrounding global trade policies is expected to have a significant impact on business investment in major economies, with the EU and UK projected to see a 2% decline in investments this year, according to a report by Oxford Economics.

Investment Decline Amid Trade War Fears

The study warns that businesses are scaling back investment plans due to increasing trade tensions, particularly those influenced by the policies of former U.S. President Donald Trump. With global trade disputes escalating, investment across key economies such as the U.S., China, the Eurozone, and the UK is facing a notable decline.

Oxford Economics found that investment undershot by approximately 4% in the U.S. and China and around 2% in the Eurozone and UK. While this decline is not catastrophic, it poses a significant challenge to global economic stability. In 2023, business investment accounted for 22% of GDP in China, 15% in the U.S., 12% in the Eurozone, and 10% in the UK. The decline in investment could have a lasting effect on economic growth.

Impact of Tariffs and Trade Policies

Beyond the uncertainty itself, higher tariffs imposed as part of ongoing trade disputes are also negatively affecting economic growth while simultaneously driving inflation higher.

The report highlights growing trade tensions between the U.S. and the EU, particularly after Trump proposed a 200% tariff on EU alcohol imports in retaliation for the EU’s 50% duty on U.S.-made whiskey. In response, the European Commission is considering countermeasures on up to €26 billion worth of U.S. goods.

Additionally, the U.S. government is closely monitoring the EU’s digital competition regulations, which could result in substantial fines for major American tech companies such as Apple and Meta. Retaliatory measures from the U.S. remain a possibility.

Small Economies at Higher Risk

Oxford Economics’ research indicates that smaller, trade-dependent economies in the Eurozone—such as Luxembourg, Slovakia, and Bulgaria—are likely to be hit the hardest. GDP in these countries could shrink by up to 1% over the next two years due to reduced investment and trade activity.

Among larger EU economies, Belgium and Italy are expected to suffer the most. Exporters that rely on U.S. markets are particularly vulnerable, as firms hesitate to expand capacity or invest in production amid the uncertainty of shifting trade policies.

This uncertainty is also affecting the automotive industry, a key sector for EU exports. The unpredictability of U.S. tariff policies has led to hesitation in investment decisions related to hiring, research and development, and market expansion. Consumers, too, are delaying major purchases, further slowing economic activity.

Possible Outcomes for Global Trade

Oxford Economics outlines four possible scenarios for trade uncertainty and its impact on private investment and global growth.

1. Rapid Decline in Uncertainty – If trade policy uncertainty dissipates by the end of the year, investment levels are expected to recover in 2026 and beyond.
2. Prolonged Uncertainty Until 2028 – If uncertainty persists and is coupled with increased tariffs, global investment could suffer long-term harm, with declines of up to 10% in the U.S. and China, 6% in the Eurozone, and 4%-5% in the UK.
3. Gradual Decline to a High-Level of Uncertainty – If uncertainty remains elevated for several years, it could lead to a sustained drag on global investment, reducing it by 10%-20% in major economies.
4. Uncertainty Lasting Until 2029 – The worst-case scenario predicts a 20% drop in investment in China, 14% in the U.S., 10% in the Eurozone, and 7% in the UK by 2029.

The report suggests that, in such a scenario, governments would need to introduce major monetary and fiscal policy interventions to prevent prolonged global economic stagnation.

A Growing Concern for Global Markets

As trade tensions persist and global uncertainty mounts, businesses are bracing for a challenging investment climate. Without a resolution to trade disputes, economic growth could face prolonged difficulties, reinforcing a cycle of low confidence and declining investments.

The coming months will be critical in determining whether global policymakers can ease tensions and provide stability, or if prolonged uncertainty will further hinder economic recovery.