The tariffs announcement by US President Trump last Wednesday evening exceeded most expectations, raising the average tariff on US imports from 2.5% to 24%, a level not seen since the 1930–40s.
These increases will dampen trade and activity in all countries, and there is a great deal of uncertainty about the outcome of any tariff negotiations. This environment also increases the risk of recession in all countries, including the US.
Rising tariffs: a drag on global growth
The increase in tariffs was expected, as it is the cornerstone of President Trump’s manifesto, but the size of the increases, the methods of calculation, and the very long list of countries affected have come as a surprise; this is a reminder of the determination to base US economic policy on high tariffs and isolationism.
These increases will be a drag on world trade and create a great deal of uncertainty about the nature and extent of the responses of the countries affected. The result will be weaker growth and higher inflation. In the short term, relocating industries is not possible and the final impact of these tariff hikes will depend on the negotiations about them and the responses of the countries concerned; some have announced that they will not raise tariffs, whereas others, such as China, have already responded, and others are preparing their responses (e.g. the eurozone).
The overall impact on growth will therefore depend on the speed of implementation, the duration of these increases and their possible downward revision through negotiations, but also on currency fluctuations, which may offset tariff increases, as well as on final import demand. Active negotiations (such as quotas for targeted purchases, lower tariffs, and non-tariff restrictions) could result in a smaller increase in announced tariffs for the major developed countries.
Some sectors remain exempt, including energy and some commodities, and products covered by the USMCA are not affected by the latest announcements. On the other hand, further sectoral increases could follow the auto and steel sectors and target pharmaceuticals.
In this context, the negative impact on US growth would be between 0.3 and 0.7 percentage points, while inflation could rise by a further 0.5–0.7 percentage points. The lack of visibility will weigh on growth, and the loss of confidence among US businesses and households could be long-lasting while they await the next budget decisions and promised tax cuts. US inflation is likely to be hit hard by higher imports and production costs, pushing it above 3% or even 4%.
Growth in the eurozone is likely to be reduced by 0.3 percentage points to 0.5 percentage points, but with some negotiations lessening the impact, as in the case for Switzerland. The United Kingdom faces lower tariff increases (10%) but could see its activity reduced by 0.2–0.1 percentage points (see graph).
Emerging markets are being affected differently by this round of tariffs. Brazil is more exposed than other Latin American economies. However, the tariff hikes will hit Asian countries the hardest, as they serve as production and export hubs: the tariff hikes vary from country to country, with Vietnam and China seeing the largest increases. In a negotiation scenario, the ultimate negative impact could be between 0.3 percentage points and 1 percentage point of growth, depending on the country. For China, tariff increases have now reached 55% since Trump took office, and the authorities have responded with targeted tariff increases and restrictions on specific exports (e.g. rare earth metals). In this environment, growth could fall by 0.5–0.7 percentage points.
The estimated impact may unfold over different time horizons in different countries. The first visible effects on the economy could be seen in the next few quarters, and growth figures will be affected in the second half of the year as well as in estimates for 2026.
The economic shock will force countries to renew budgetary supports and accelerate monetary easing. China’s budget deficit could well exceed the 4% reported at the beginning of the year, and the eurozone will have to provide aid to the most vulnerable sectors, pending a more global, NGEU-style response. In the very short term, the Fed may not be able to ease interest rates; however, the prospect of a deteriorating economy and rising unemployment should force the Fed to cut rates, even if inflation remains above its 2% target.
World growth estimates of tariffs and trade war impacts on scenarios
Trade war and geopolitical risks: spectre of recession looms larger
The response of US trading partners will also contribute to a lasting change in the trajectory of the global economy. Widespread tariff increases would trigger a major trade war. Moreover, if China, Europe and Japan were to confront the United States directly, the risks would shift from trade to widespread geopolitical tensions, destroying the treaties and international relations built up over several decades.
In the extreme case of a generalised trade war, global growth would fall by more than 1 percentage point, with the US down 1.7 percentage points, Europe down 1 percentage point and China down 2 percentage points (see table).
Recent statements by the US administration have increased the risk of a recession, but the extreme scenario mentioned here is still quite remote. However, uncertainties may persist for a long time after any negotiations, and a lack of visibility will persist. Poorly calibrated statements or over-hasty reactions on the part of the US authorities and the rest of the world could lead the markets to consider extreme scenarios, even if that probability remains low.
The opinions expressed in this document are as at 7 April 2025 and are subject to change without notice.
