Global Debt and Trade Wars
Debt used to be something most people only worried about when it came time to pay off their mortgage or student loans.
But is global debt emerging as a global crisis in our modern world?
Governments, companies, and households worldwide are swimming in red ink, and the water is rising. From Washington to Beijing to Brussels, the world’s biggest economies are shouldering record-breaking debt loads.
Add a revived tariff war sparked by Donald Trump’s return to the political scene, and you’ve got a world economy teetering between resilience and recklessness.
In this article, we’ll unpack the state of global debt today. We’ll dig into the specifics of the U.S., China, and Europe (the three heavyweight economies) and explore what their rising obligations mean for your wallet, the markets, and the future of global cooperation.
Note: It’s complicated, so this article cannot cover everything.
What Exactly Is Global Debt?
At its most basic, global debt is the total amount of money owed by the world’s governments, companies, and households. It includes sovereign (government), corporate, and household debt.
As of mid-2024, global debt ballooned past $315 trillion, more than 330% of global GDP (Institute of International Finance, 2024).
It means that for every dollar of value the world’s economy creates, there is more than three dollars of debt behind it.
Now, debt in itself isn’t necessarily a problem.
Borrowing fuels innovation, funds public infrastructure, and helps countries respond to emergencies like the COVID-19 pandemic. But when debt grows faster than the ability to pay it off and interest rates rise simultaneously, it creates serious risks.
The United States: Printing Dollars, Piling Debts
The U.S. national debt is over $34 trillion (U.S. Treasury, 2025), equivalent to around 120% of GDP. That means if the entire U.S. economy, i.e. every salary, sale, and stock dividend, were used to pay off debt, it still wouldn’t be enough.
Where did this mountain come from?
It has arisen from wars, tax cuts, stimulus packages (especially during COVID-19), and ballooning entitlement programs like Medicare and Social Security.
Add the cost of interest, now nearly $1 trillion per year, to this, and you start to see the scale of the problem.
The plot thickens, though, because almost 30% of U.S. government debt is held by foreign investors, with Japan still leading the pack. Once a major buyer of U.S. Treasury bonds, China has been steadily cutting its holdings, which can be considered a strong economic and geopolitical signal.
To make matters worse, Trump’s 2025 tariffs aimed at “levelling the playing field have introduced new inflationary pressures just as the Federal Reserve is trying to get prices under control.
The Fed has kept rates elevated to curb inflation, which means higher borrowing costs for everyone, from homeowners to the federal government (Goldman Sachs Research, 2025).
What’s next for the U.S.?
Best-Case Scenario
Debt stabilises as economic growth accelerates, driven by productivity gains, tech innovation, and the reshoring of key industries.
Inflation drops steadily, allowing the Federal Reserve to lower interest rates by mid-2026, easing the debt servicing burden.
Bipartisan reforms emerge to gradually trim entitlement spending and modestly raise taxes on high-income earners and corporations.
Global confidence remains intact, and continued strong demand for U.S. Treasuries keeps borrowing costs manageable.
The result is that the U.S. manages a “soft landing” with high debt but strong growth, preserving the dollar’s dominance and avoiding fiscal or political crises.
Most Likely Scenario
Incremental policy changes occur, with some spending cuts and limited revenue measures, but no structural reform.
Interest costs remain high, absorbing an increasing federal budget share (potentially 15–20% within 5 years).
Tariffs drive mild inflation, forcing the Fed to keep rates “higher for longer,” slowing economic momentum.
Markets stay stable, with periodic volatility tied to debt ceiling showdowns or inflation surprises.
The result is a slow fiscal grind: no collapse, but less money for infrastructure, R&D, or social programs. Debt continues rising, but it is not catastrophic yet.
Worst-Case Scenario
Political paralysis prevents meaningful fiscal action, and debt ceiling crises or government shutdowns become regular occurrences.
Investor confidence wanes, driving bond yields up sharply; a debt downgrade triggers a selloff in Treasuries.
Stagflation takes hold, with high inflation and weak growth. The Fed is forced to choose between killing inflation and supporting growth.
Global dollar dominance erodes, as countries accelerate efforts to trade in alternative currencies or diversify reserves.
The result is a U.S. debt and currency crisis. Financial instability spills into global markets, and the U.S. loses fiscal flexibility when needed.
China: Hidden Debt, Slowing Growth
China’s debt story is more shadowy.
While its official government debt is around 80% of GDP, once you include local government financing vehicles (LGFVs) and off-the-books obligations, total debt tops 300% of GDP (IMF, 2024).
What’s driving this? Essentially, three things:
1. Massive infrastructure spending.
2. Corporate borrowing, especially by state-owned enterprises (SOEs).
3. A now-crumbling real estate sector that once comprised nearly 30% of the economy.
The collapse of real estate giant Evergrande in 2021 was just the tip of the iceberg.
Other developers are in trouble, and millions of homeowners are stuck with unfinished or devalued apartments. Youth unemployment is sky-high, domestic consumption is weak, and global demand for Chinese exports is slowing.
So why hasn’t there been a full-blown financial crisis?
1. China controls its banks.
2. Most debt is owed domestically.
3. Beijing is good at papering over bad news.
Still, the risk of “Japanification” looms with decades of stagnation, low productivity, and sluggish growth. China’s central planners are trying to pivot toward domestic consumption and high-tech innovation, but it’s slow (Pettis, 2023).
So, what’s next for China?
Best-Case Scenario
Successful rebalancing: China shifts from debt-fueled infrastructure and property investment to innovation, green energy, and domestic consumption.
SOE and local debt restructuring proceed smoothly, with minimal contagion and selective bailouts that restore confidence.
Vocational education, tech industry expansion, and gig economy growth improve youth employment.
Global trade stabilises, with moderate tariffs and a diversified export base (e.g., EVs, renewables, AI services).
The result is that China avoids a hard landing, curbs excessive leverage, and sustains 4–5% GDP growth through controlled liberalisation and targeted stimulus.
Most Likely Scenario
Debt overhang persists, especially in local governments and state-linked enterprises.
The property sector remains sluggish, with continued bankruptcies and weak housing demand, dragging on consumer confidence.
Growth slows to 3–4%, below target but politically manageable.
Tight financial controls prevent crisis, but restrict innovation, capital mobility, and private enterprise growth.
The result is a prolonged “balance sheet recession” similar to Japan’s lost decades. China avoids collapse but sacrifices dynamism and global economic leadership.
Worst-Case Scenario
The property market collapses, triggering a wave of defaults in LGFVs and shadow banks.
Capital flight pressures the yuan, forcing Beijing to burn through reserves or tighten capital controls.
Youth unrest escalates, testing the social contract between the Party and the public.
External shocks (like a significant tariff escalation or a Taiwan crisis) compound internal weaknesses.
The result is a systemic financial crisis that triggers rapid economic contraction, erodes international investor trust, and pushes China into prolonged stagnation or social upheaval.
Europe: Managing Debt with Duct Tape
Europe’s debt drama is familiar and far from over.
The eurozone’s average debt-to-GDP ratio hovers around 90%, but key players like Italy (140%), Greece (110%), and France (105%) are well above that threshold (European Commission, 2025).
Unlike the U.S., individual EU countries don’t control their currencies. The European Central Bank (ECB) manages the euro, making coordinated fiscal responses harder, especially when political winds shift.
Remember the 2010–2015 sovereign debt crisis?
That trauma still haunts EU policymakers. And with Russia’s invasion of Ukraine still reshaping Europe’s energy and defence spending priorities, debt loads are creeping upward again.
Add ageing populations, populist pressures and slow productivity growth to that, and you have a recipe for persistent fiscal tension.
So, how are things likely to play out for Europe?
Best-Case Scenario
Structural reforms unlock productivity, especially in Southern Europe, boosting labour markets and digital competitiveness.
Political centrism prevails, keeping populism at bay and preserving EU unity.
The ECB balances debt sustainability and inflation control, supporting moderate growth.
Energy diversification succeeds, cutting reliance on Russian fossil fuels and stabilising energy prices.
The result is that Europe strengthens its fiscal resilience, sustains modest growth (1.5–2.0%), and regains influence as a green-tech and regulatory leader.
Most Likely Scenario
Debt remains elevated, but markets tolerate it due to ECB support and cautious fiscal policy.
Political fragmentation slows reform. Germany and France face weaker coalition governments; populism simmers but doesn’t dominate.
Growth stays low, around 1%, with notable disparities between North and South.
Energy transition is bumpy, leading to higher costs and industrial competitiveness challenges.
The result is that Europe avoids crises but loses ground globally. Economic mediocrity persists, especially relative to the U.S. and dynamic Asian economies.
Worst-Case Scenario
A debt crisis reignites, for example, if Italy’s borrowing costs spike or populist governments reject EU fiscal constraints.
ECB policy splits, with northern countries demanding austerity while the south demands stimulus.
The Eurozone fractures through an exit threat (Italy or Hungary) or a de facto two-speed Europe.
External shocks (e.g., NATO tensions, cyberattacks, or energy shortages) fuel internal dysfunction.
The result is that a European financial crisis triggers banking stress, bond selloffs, and a significant hit to global investor confidence, deeply shaking the EU’s credibility.
Trump’s 2025 Tariff Tsunami
Back in office and bolder than ever, Donald Trump has revived his tariff-first strategy.
In 2025, new import taxes target China and traditional U.S. allies, including Germany, South Korea, Japan, and Brazil (Financial Times, 2025).
The goal?
Shrink the U.S. trade deficit and boost domestic manufacturing.
The likely result?
1. Higher consumer prices. Tariffs are taxes, after all.
2. Retaliatory tariffs from China, the EU, and others. (As we see, this is currently playing out.)
3. Supply chain chaos as firms scramble to shift production away from China toward countries like Vietnam and Mexico.
It is dangerous timing for a U.S. economy already stretched by debt and inflation, and could force the Fed to stay hawkish longer, raising borrowing costs and dampening investment.
The winners will likely be selected U.S. manufacturers, Mexico, and Vietnam; the losers are U.S. consumers, exporters, emerging markets, and global growth.
What Happens If Debt Keeps Climbing?
If debt continues to rise unchecked, here’s what we could see:
1. Rising Interest Rates
Governments may need higher returns to attract bond buyers, especially as investors grow nervous. That means more taxpayer money is going into interest and less into services.
2. Crowded Out Investment
High public debt can soak up capital, leaving less available for private-sector innovation.
3. Debt Crises in Weaker Nations
Emerging markets with dollar-denominated debt are especially vulnerable. A strong dollar and high U.S. rates make it harder and more expensive to repay loans.
4. Currency Volatility
If confidence in sovereign debt wanes, currencies could plummet. Argentina and Turkey have shown how fast this can spiral.
5. Geopolitical Realignment
Debt also means dependency. Countries that borrow from China’s Belt and Road Initiative may be politically beholden to Beijing. Likewise, nations relying on U.S. dollar-denominated debt are affected by Fed policy, whether they like it or not.
Is a Global Debt Crisis Inevitable?
Not necessarily.
Yes, debt is high. Yes, interest rates are climbing. But here’s the paradox: in a world where everyone is in debt, there’s less pressure to act urgently.
The status quo can drag on as long as inflation remains somewhat manageable and growth doesn’t collapse.
What keeps the system afloat?
1. The U.S. dollar’s status as global reserve currency.
2. Central bank tools like quantitative easing and swap lines.
3. The absence of credible alternatives (China’s yuan isn’t freely convertible; the eurozone lacks cohesion).
That said, debt does limit options.
When the next crisis hits, whether it’s a pandemic, war, or climate catastrophe, governments may find they have fewer financial tools left in the toolbox.
The Road Ahead
Looking ahead, we’re likely entering a decade of adjustment; not a sudden crash, but a slow, grinding transformation.
Governments will need to prioritise whether to invest in productivity, health, and climate resilience or double down on short-term fixes.
Businesses will need to navigate fragmented global supply chains, shifting tariffs, and tighter credit conditions.
Citizens will need to brace for higher taxes, fewer public services, and more economic volatility.
Flexibility, innovation, and transparency will be the differentiators.
Countries that can adapt (think smaller, agile economies like the Nordics or Singapore) may punch above their weight. Those stuck in political gridlock or locked into rigid financial structures will struggle.
It is worth remembering that the global debt story isn’t just about numbers.
It’s about values, priorities, and resilience. The path forward will be rocky in a world of rising debt and retreating global cooperation.
But it’s not hopeless.
The key challenge is balancing the urgent need to service today’s debt with the long-term imperative to invest in the future.
Until next time, buckle up. It promises to be quite a ride.
Dion Le Roux
References
Bown, C. P., & Irwin, D. A. (2019). The Trump Trade War: A Timeline. Peterson Institute for International Economics.
European Commission. (2025). Spring 2025 Economic Forecast.
Financial Times. (2025). Trump’s Global Tariff Spree: New Trade Barriers and Global Reactions.
Goldman Sachs Research. (2025). U.S. Tariffs and Inflation: What to Expect in 2025.
Institute of International Finance. (2024). Global Debt Monitor: May 2024 Update.
International Energy Agency. (2024). World Energy Outlook 2024.
International Monetary Fund. (2024). People’s Republic of China: Staff Report for the 2024 Article IV Consultation.
Pettis, M. (2023). The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy. Princeton University Press.
South China Morning Post. (2025). China Threatens Retaliation Over Latest U.S. Tariffs. U.S. Department of the Treasury. (2025). Monthly Statement of the Public Debt of the United States.