Economic shock and awe: How can the Caribbean respond?

by Kari Grenade, PhD, Caribbean Economist and Macroeconomic Advisor

The US is the richest country on the planet, with large surpluses with major trading partners in Asia, Europe, and the Americas from trade in services such as financial, entertainment, and high-tech, for example.

Notwithstanding its tremendous trade advantages in services, on 2 April 2025 (dubbed “liberation day”), the new administration announced the imposition of a slew of reciprocal tariffs on several trading partners worldwide to address what it claims to be decades of unfair practices by some trading partners that have resulted in its massive deficits from trade in certain goods such as steel, automobiles, and automobile parts for example.

The implementation of reciprocal tariffs and the trade wars that are likely to ensue will worsen the extant economic situation. The policy utterances and actions of the new administration since 20 January 2025 are already delivering shock and awe to the global economic, financial, and trading systems. In recent weeks, key economic indicators in the US have been weaker than expected, signalling a softening in economic activity, so much so that several reputable institutions and economic forecasters have downgraded their 2025 estimates for economic growth in the US and some have even forecasted a recession for the country within the next 12 months.

The new trade and economic policies will have profound impacts on Caribbean economies. Tariffs on steel, aluminium, critical minerals, food items, automobiles, and automobile parts, for example, will push up the prices of those items globally, aggravating cost-of-living pressures for Caribbean citizens. Additionally, the proposed imposition of a million-dollar fee on Chinese-operated and Chinese-built vessels each time they dock in ports in the US will obviously increase global shipping costs (astronomically, according to some Caribbean trade experts), making food, fuel, and other imports even more expensive for Caribbean citizens and potentially negatively impacting cruise tourism. Furthermore, should the volatility in stock markets in the US become more acute, financial investments held by individual Caribbean investors, as well as Caribbean financial and other institutions, such as pension funds and social security, would take a serious hit.

Meanwhile, inflation is edging up in the US based on recent data. Higher inflation combined with slower growth or even recession (a situation referred to as stagflation) in the US will have profound macroeconomic impacts for the Caribbean. Furthermore, cuts in public expenditure in the US will drive up unemployment there, not just in the public sector but all other sectors that rely on government contracts and aid. A rise in unemployment and reduced disposal incomes in the US automatically mean fewer US tourists to the Caribbean, as well as less remittances, investments, and revenues to governments.

In addition to the potential economic impacts, the region will also have to deal with the attendant social and psychosocial impacts from increased deportations arising from changes in the new administration’s immigration policies. Furthermore, the region’s climate actions could also be severely hampered because of the new administration’s stance on climate change.

Caribbean countries will yet again have to face consequences of actions not of their own making. Indeed, the region is used to economic shocks. Though repeatedly buffeted, usually after 4 to 5 years, countries tend to recover and are able to muster the strength to limp along until the next economic shock. But this time might be different. The economic shock that the Caribbean is likely to face could be unprecedented in scale, impact, and duration. It seems that the world will have to deal with the impacts of a new era in the US given the strong resurgence of populism, nationalism, protectionism, and industrialism. Accordingly, geopolitical and trade tensions are likely to intensify and consequently, economic policies are likely to become more defensive, trade rules more restrictive, and policy spaces narrower to manoeuvre.

How can the Caribbean respond? I offer some suggestions in what follows.

2 April 2025, should also be liberation day for the Caribbean. A day when the policymakers and peoples of the Caribbean get serious about starting to liberate ourselves from the bondage of economic insecurity. Economic insecurity that manifests itself in limited economic diversification, over-reliance on a handful of unsophisticated exports, limited export markets and trading partners, inadequate economic cooperation and collaboration, and a siloed and insular approach in pursuing economic prosperity. Achieving economic security and prosperity requires, among other imperatives, a large diversified production and export base that can exploit comparative advantages and promote economic resilience. There is no escaping the fact that economic security requires scale. Individual small islands acting alone or acting together in superficial ways will be forever lamenting their vulnerabilities and decrying their dependencies.

Liberation day for the Caribbean should see not just a recommitment by its leaders to deepening regionalism, but a day to get serious about fashioning a new sustainable development paradigm for the Caribbean. A new sustainable development paradigm that is geared at strengthening social, economic, and environmental resilience through strategic and scaled-up investments to enhance human and social development, boost innovation and economic growth, and finance climate mitigation and adaptation. The cornerstone of the new sustainable development paradigm should be the establishment of a full-fledged Caribbean economic union by 2045. Accordingly, the region has to start contemplating bold actions and the transformative shifts in policies, practices, institutions, and mindsets that will be required for full economic union. Policymakers must start laying the groundwork soonest. Ultimately, the Caribbean Single Market and Economy (CSME) must be unchained; currencies must be convertible and a single currency in use eventually; institutional enclaves and silos must be jettisoned to better leverage synergies and optimise impact; human and technical resources must be pooled in a more organised and strategic manner; financial, regulatory, digital, and administrative arrangements must be joined up more systematically; and Caribbean nationals living in the diaspora must be strongly encouraged to return to the region to help build the economies.

While not losing sight of the medium and long-term imperatives, Caribbean policymakers must simultaneously address the immediate priorities. They must strategise on how best to navigate the new realities in the short term. Caribbean policy makers must pool expertise and consolidate negotiation strategies to engage high-level counterparts in the US with a view to making the case for exemptions and waivers for the region in relation to the proposed million-dollar fee on Chinese vessels docking in US ports, given the potential devastating impacts on cruise tourism as well as goods exports.

The region must also actively explore alternative markets from which goods can be imported, as well as alternative trading partners, supply chains, and delivery routes. Increasing intra-regional trade (particularly, but not exclusively of agricultural products) and promoting self-sufficiency (regionally) in certain products such as poultry, livestock, and coffins, for example, must be prioritised. Additionally, the feasibility of establishing formalised strategic alliances between importing firms (within and across Caribbean countries) in the areas of bulk purchasing and consolidated shipping should also be actively explored. Crucially, the region must also prioritise concrete actions to safeguard energy security as well as food and nutrition security.

Importantly also, Caribbean governments can ill afford to fiddle at the margins of economic policies but must deal frontally and potently to cushion the impact of a possible stagflationary environment (low growth and high inflation). Counter-cyclical fiscal policy (spending more in bad times) must be prioritised, cost-of-living easements expanded and/or extended, and social safety net programmes for the poorest and most vulnerable scaled-up. Concurrently, credible fiscal strategies must be developed for fiscal correction and improvement over the medium term. Caribbean central banks that use monetary policy to control inflation could find themselves in a “spot of bother” if high inflation is combined with low economic growth and as such, they will have to strike a delicate balance between tamping down inflation and stimulating growth.

These are not ordinary times for the Caribbean, and as such, no ordinary solutions will do.

In the famous words of [St Lucian economist] Arthur Lewis, “The British West Indians can solve their own problems, but first they must find the secret that will put hope, initiative, direction, and an unconquerable will into the management of their affairs.”