While there is a possibility that some of these tariffs may be negotiated down in time, they could also increase further after retaliation and additional sector-specific tariffs.
Thus, leaving investors to wonder if a stagflationary shock is on the way.
Higher and broader increases than expected
President Donald Trump has announced a reciprocal tariff regime with the US imposing a minimum universal tariff of 10% on all trade partners – excluding Mexico and Canada – from April 5, and higher reciprocal tariffs on roughly 60 economies from April 9 (Chart 1).
Chart 1. The 10% global baseline is a floor on tariff rates, with higher rates for economies with which the US runs trade deficits
The administration has focused on trade deficits as the backbone of the reciprocal tariff calculation, rather than attempting a highly complex market-by-market assessment of product-level tariffs and non-tariff barriers.
Instead, the reciprocal tariff is calculated by dividing each market’s trade surplus with the US by its total exports. The Trump administration describes this number as the “tariff charged to the US” by each trade partner.1 This number is then roughly halved (what Trump called “kind reciprocal”), resulting in the rate applied by the US.1
Some will lose more than others
While we believe no winners will come from this trade war, a relative spectrum has emerged.
Canada and Mexico were notable for their absence from the tariff board, although the previously announced 25% tariff on non-United States-Mexico-Canada Agreement (USMCA) compliant goods and 10% on energy and potash have come into effect.
Should Canada and Mexico address the US’s concerns over fentanyl, a 12% tariff would be applied to non-USMCA-compliant goods. And presumably exporters will rush to increase the share of North American trade that is USMCA-compliant.
On the other hand, Asia appears to be the biggest loser from the announcement.
While new tariffs on China were expected, announcing a 34% reciprocal tariff that stacks on top of existing tariffs was higher than anticipated. This pushes the average bilateral tariff rate close to 70%.
Other major regional economies, including Japan, South Korea, India, and Vietnam, now face tariff rates ranging from 24% to 46%. Europe has landed roughly in the lower-middle range, facing 20% tariffs, while the UK appears to be a relative winner, with tariffs of only 10%.
Will tariffs go higher still?
There is a meaningful risk that last week’s announcements, as dramatic as they were, do not represent peak tariffs. We believe additional sector-specific tariffs are coming, including semiconductors, copper, lumber, and pharmaceuticals.
Indeed, these products were mentioned in the executive order, specifying that the reciprocal tariff policy does not apply to them or any product currently subject to a Section 232 tariff, including autos, steel, and aluminum.2 The wording appears to leave the door open to introducing more specific rates in the future. On the other hand, this suggests that sector-specific and reciprocal tariffs aren’t additive.
Additionally, the executive order grants the president the authority to adjust tariff rates in response to retaliatory measures, potentially leading to higher rates on certain trade partners.
The EU has been clear that it intends to push back proportionally, with trade ministers meeting earlier this week to discuss a response. Canada has also pledged to retaliate.
China’s response may be relatively reserved, but we expect that the authorities will reach for their retaliation playbook, curbing exports of critical minerals and pressuring US corporates operating in China – with Tesla a likely target.
A big question remains whether the authorities will condone a substantial foreign exchange depreciation. The renminbi fixing was moved modestly higher overnight, suggesting a continued desire to lean against depreciation pressure. But the scale of the tariff move could prompt a rethink over time, particularly given China’s tepid inflation.
Alternatively, could tariffs move lower?
There is still the possibility that US tariffs will settle at a lower level eventually, which is probably still a widespread expectation.
The 10% global baseline is likely a floor, but structuring the reciprocal tariff as an additional rate on top of that at least leaves some chance of it coming down. Behavioral changes of US consumers may also bring the effective rate down somewhat. A very negative market and voter response may incentivize the Trump administration to temper its policies.
However, any de-escalation might be slow, and it is not clear what concessions the administration will seek in exchange for lowering tariffs. With potentially all affected markets seeking to negotiate at once, the US administration may suffer from a lack of bandwidth.
Moreover, since the calculation for reciprocal tariffs is based on trade deficits, rather than product-specific tariff rates facing US exporters, the quick win of reducing tariffs on US goods may not be good enough. As a separate plank of tariff policy, sector-specific tariffs may not be up for negotiation.
With higher tariffs applied almost universally, trade diversion will likely be modest. At a more fundamental level, there is little reason to believe that these measures will succeed in reducing the US trade deficit, which could limit the scope of rolling back tariffs under the new framework.
Finally, the administration appears far more tolerant of market weakness than in Trump’s first term. Indeed, given the administration's preferences, low bond yields and a weaker dollar may be actively helpful market moves.
Stagflationary economic impacts
The net impact on the US economy will almost certainly be stagflationary, although the magnitude of the price level increase and of the GDP hit are hard to pin down.
The shock to growth and inflation is sensitive to whether tariffs are perceived as temporary or permanent, the scope for firms to absorb price rises in their margins, currency moves, and how financial markets react, among other things.
A crude rule-of-thumb is that every one percentage point increase in the US weighted average tariff rate translates into a 0.1 percentage point rise in the price level and knocks 0.05–0.1% of GDP.[3] This would suggest that the increase in US tariffs last week and in recent weeks could add 2% to the price level and push GDP down by 1–2%.[3]
There is a potential for some offsetting economic benefits if the roughly $0.6 trillion (~2% GDP) raised by the tariffs is used to finance tax cuts rather than deficit reduction. However, once the dynamic impacts of the tariffs are accounted for, which captures the fact that productivity growth is likely to be lower over the long run due to the higher tariffs, then the revenue raised is likely to be much smaller. Some estimates suggest that only half of the $0.6 trillion touted by the administration will be raised.
Moreover, if the revenue is used on tax cuts, it would make negotiating away the tariff increases in the future more difficult.
The Fed faces a difficult trade-off. Policymakers have previously talked about tariffs having only a transitory impact on US inflation, but, given the recent sharp increase in inflation expectations, it may be difficult for the Fed to look through this impact.
Final thoughts
We estimate that the US average tariff rate will increase to 22% given these measures. This is above the 1930s highs and last reached in the early 1900s. While there may be scope for this to come down over time as deals are done with trade partners, it’s also possible that the tariff level keeps moving higher in the near term as retaliation occurs and more sector-specific tariffs are introduced. Pending further modelling, we believe the full increase in US tariffs so far in Trump’s term could add 2% to the US price level and push GDP down by 1–2%. This would leave the US economy flirting with a recession. Beyond the US, while there are no winners from this trade war, a relative spectrum has emerged. Canada and Mexico appear to get off lightly, China and Asian economies are heavily impacted, and Europe sits somewhere in the middle, with the UK facing a lower rate than the EU. Nevertheless, we believe the tariffs will be a negative growth shock for the global economy.
1 "Trump unveils global reciprocal tariffs." Reuters, April 2025. https://www.reuters.com/world/us/trump-unveils-global-reciprocal-tariffs-2025-04-02/.
2 "Section 232 Additional FAQs." Autos. U.S. Customs and Border Protection, April 2025. https://www.cbp.gov/trade/programs-administration/entry-summary/section-232-additional-faqs-autos/faqs.
3 "Industry reacts as Trump imposes tariffs across the globe." Investment International, April 2025. https://investment-international.com/News/industry-reacts-as-trump-imposes-tariffs-across-the-globe/.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security.
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