Paul Krugman warns Americans will be poorer as world pivots away from US economy

Nobel Prize-winning economist Paul Krugman has warned that the rest of the world is starting to pull away from the United States, driven by frustration with President Donald Trump’s threats, and that the shift will ultimately leave Americans poorer.

Krugman pointed to the breakthrough free trade agreement between India and the European Union, announced on 27 January 2026, as evidence that major economies are looking to reduce their reliance on the US. Ursula von der Leyen, President of the European Commission, described the pact as “the mother of all deals”. Krugman wrote that, while the label may be overstated, the agreement is historically significant beyond economics because it signals countries moving “step by step” towards an “economic divorce” from America.

Why countries are stepping back from the US

Writing on Substack, Krugman argued that unlike Trump’s view of global trade as a winner-takes-all contest, the EU and India see mutual gains in lowering barriers between two large economies. He noted that the EU’s economy is comparable in size to the US, while India has grown into a major player after decades of rapid expansion.

He added that the two sides’ economies are complementary: Europe stands to benefit from lower Indian tariffs on exports such as cars, while India could gain greater access for its labour-intensive products in European markets.

“Real” deal versus headline-grabbing pledges

Krugman contrasted the EU–India pact with what he described as Trump’s preference for splashy “deals” based on vague investment pledges rather than enforceable trade terms. He cited analysis from the Peterson Institute for International Economics suggesting the basis for Trump’s claim of $18 trillion in investment commitments is unclear, with tracked or announced totals substantially lower and often aspirational.

Krugman’s bottom line: if major partners keep diversifying away from the US, the costs of that isolation—through weaker trade links, reduced competition, and higher prices from tariff politics—will be borne at home, making Americans poorer over time.

Meaning beyond economics: divorcing the United States

Krugman says that beyond the economic benefits, something even more important is at stake: the EU–India agreement marks a major step by the global economy towards an “economic divorce” from the United States. While the economic logic has been clear for a long time, concluding the deal required both sides to overcome narrow vested interests. What changed the equation, he argues, is that both Europe and India are now looking for ways to pivot away from trading with America.

Europe has many reasons to be unhappy with the Trump administration, ranging from false claims that Europe has taken unfair economic advantage of the US, to threats aimed at protecting America’s big tech interests, interference in European domestic politics by supporting the far right, and even talk of seizing Greenland.

India, he says, has even more reason. The Trump administration imposed tariffs on Indian exports averaging as high as 34.5%—roughly on a par with those applied to Chinese goods. Krugman calls this bizarre both economically and diplomatically, because previous US administrations had tried to cultivate closer ties with India as a counterweight to China, a dangerous rival. But everything changed, he argues, when the US leader became erratic.

Foreign companies are pulling back too

Krugman notes that it is not only governments that are steering away from the US; foreign private firms are starting to do the same. He points to three headline stories reported by Reuters and Bloomberg: (1) Volkswagen halted plans to build an Audi plant in the US because Trump’s tariffs were hurting profitability; (2) German investment in China rose to a four-year high, boosted by the US trade war; and (3) the US was losing top tech talent to India as Trump’s new H-1B visa rules disrupted the market.

US threats are no longer effective

As Krugman wrote his article, he said Trump had not yet responded to the EU–India agreement—perhaps because officials in his administration were preoccupied with the “Pretty” murder case. But he predicted that it would not be long before Trump posted angry tweets, similar to how he reacted to a Canada–China trade deal. In general, Krugman says we should expect Trump to threaten tariffs against any country that tries to reduce reliance on the US, driven by policy made through bursts of anger online.

However, he argues that America’s economic intimidation will not work any more, because Trump does not hold the stronger hand. Access to the US market is not as crucial to other countries as Trump believes.

The world no longer needs the US in the same way

Krugman cites a key figure: the share of other countries’ GDP accounted for by exports to the US. On average, it is under 5%, and far lower still if Canada and Mexico are excluded.

As the graph shows, when the same measure is calculated for the European Union, the figure is almost twice as high. In other words, the world “needs access” to the EU market more than it needs access to the US market.

A new era for the global trading system

“The global trading system as we knew it lasted for three generations after the Second World War. It was a rules-based system in which every country saw the United States as a reliable, trustworthy partner. But now America’s economic relationship with other countries has become coercive and exploitative, and the world is moving towards a ‘clean break’—one that will make Americans noticeably poorer,” Krugman warned.