The Impact of Tariffs on the Global Economy: A Comprehensive Analysis

April 1, 2025

1. Executive Summary:

The recent implementation and proposed expansion of tariffs have generated significant concerns regarding their wide-ranging effects on the global economy. This report synthesizes current research and expert analysis to comprehensively assess these impacts, spanning direct economic consequences, trade dynamics, macroeconomic stability, political considerations, strategic objectives, and long-term structural shifts. The analysis indicates that while tariffs are intended to protect domestic industries and achieve geopolitical goals, they will likely result in increased consumer prices, reduced trade volumes, and a drag on overall economic growth. The probability of escalating trade wars remains substantial, posing further risks to global economic stability. Long-term scenarios suggest that while some domestic industries may experience capacity growth, this could be accompanied by inefficiencies and a weakening of multilateral trade norms. Considering the balance of probabilities and potential outcomes, the short-term outlook is predominantly negative. At the same time, long-term benefits remain uncertain and contingent upon strategic reinvestment and a de-escalation of global trade tensions.

2. Introduction:

The global trade landscape has undergone a period of significant upheaval with the recent imposition of tariffs by major economies. These actions, driven by a desire to bolster domestic industries, address trade imbalances, and achieve strategic objectives, have sparked widespread debate and concern among economists, businesses, and policymakers alike. This report aims to provide a comprehensive and multidimensional analysis of the multifaceted effects of these tariffs, moving beyond simplistic assessments to incorporate the inherent uncertainties and probabilities associated with various outcomes. By synthesizing existing research and expert opinions, this analysis offers a balanced perspective on the potential consequences of this shift in trade policy, both intended and unintended.

3. Direct Economic Effects:

• Consumer Prices: Imposing tariffs, essentially taxes on imported goods, invariably impacts consumer prices. Research consistently shows that the cost of imported goods rises as tariffs increase. This increase often translates directly to higher consumer prices, reducing purchasing power. However, the extent of this impact is significantly influenced by the product’s elasticity of demand. For goods with inelastic demand, where consumers have few readily available substitutes, tariffs lead to higher prices that the consumer absorbs. For instance, a 2019 study on the US tariffs on washing machines revealed that the price of foreign-produced brands rose by nearly 12%. Interestingly, domestic producers also increased their prices, along with the price of non-tariffed goods like dryers, resulting in a $1.5 billion cost to consumers for approximately 1,800 jobs created. This example highlights that tariffs do not always compel a shift to domestic production and can lead to broader inflationary effects.   

J.P. Morgan Research estimates that already imposed tariffs will create a 0.2 percentage point bump to headline inflation, further emphasizing the immediate impact on consumer prices. Their analysis underscores that the degree to which tariffs raise final consumer prices depends on factors such as the elasticity of demand and exchange rate movements. Still, the tax burden nearly always falls on domestic sellers and consumers. The Atlanta Fed’s research indicates a potentially more substantial impact, suggesting that additional tariffs on imports from China, Canada, and Mexico could raise consumer prices on everyday retail purchases by 0.81%, with tariffs on goods from Canada and Mexico contributing a significant 45% to this effect. This highlights the interconnectedness of North American supply chains and the broad impact of tariffs extending beyond those targeting major adversaries.   

The effects of tariffs on raw materials like steel and aluminum also cascade through the economy, leading to downstream inflationary pressures. Deutsche Bank Research projects a 30 to 40 basis point increase in core inflation in 2025 due to steel and aluminum tariffs, contingent on the extent to which these costs are passed on to consumers. These tariffs can drive up prices of various goods ranging from autos to canned drinks, and higher input costs for manufacturers can lead to inflation in goods-intensive services such as motor vehicle repair and segments of the food industry. As companies adjust pricing strategies, spillover effects could extend to markets like used cars and airline fares. Economists generally agree that these tariffs will ultimately be passed along to consumers through higher prices for various goods, including autos, groceries, and housing. This impact may not be limited to goods, as rising input costs due to tariffs on goods can eventually filter through to the pricing of services. The Yale Budget Lab estimates that the typical American family could face higher annual costs of between $1,600 to $2,000 due to the new tariffs, with potential price jumps of up to 40 cents per gallon for gasoline in some regions, about 3% for fresh produce, 2% for food overall, 11% for electronics, and potentially over $12,000 for some car models. The Boston Fed estimates that additional tariffs on Canada, Mexico, and China could add as much as 0.8 percentage points to core inflation. Synthesizing these findings suggests a likely increase in consumer prices ranging from a modest 0.2% to potentially 12% or even higher in specific sectors, with widespread downstream inflationary pressures across various industries and services.   

• Domestic Industry Impact: Tariffs are often implemented to bolster domestic industries by making imported goods more expensive. President Trump stated that auto tariffs would foster domestic manufacturing, and the White House estimated these tariffs would raise $100 billion in annual revenue. However, global automakers express skepticism, anticipating significant pain and higher prices for American car shoppers. Similarly, the reimposition of steel tariffs aims to stimulate US steel production, potentially leading to increased revenues and improved pricing power for domestic steel producers. The goal is to increase domestic steel capacity utilization to above 80%. Some analysts predict price increases for hot-rolled coil steel of 15-20% within six months, potentially generating $4 billion in additional annual revenue for major producers. This policy is also intended to revitalize the American foundry industry by making imported steel more expensive and encouraging businesses to buy domestically produced steel.   

However, these potential gains in protected sectors like steel and potentially automotive manufacturing (in the long term and under specific conditions) may come at the cost of job losses in industries reliant on imported goods. The reimposed steel tariffs are expected to increase production costs for manufacturers using steel as a primary input, potentially leading to a loss of competitiveness in global markets and job losses in steel-consuming industries like automotive manufacturing, construction, and appliance production. For the automotive industry, looming tariffs on imported cars and parts could lead to job losses for American autoworkers, particularly in the short term. Even if only Mexican and Canadian assembly plants were to shut down due to lost access to the US market, US suppliers sending parts to those plants would be affected, potentially leading to production trimming and staff reductions. American parts suppliers employ about 550,000 workers, nearly twice as many as auto assembly plants, indicating a significant potential for job losses in this sector. Cox Automotive predicts a 10% to 20% reduction in car production across North America due to the tariffs, which could reach as high as 30% if tariffs extend to Canadian and Mexican auto parts. The Yale Budget Lab’s modeling suggests that with retaliation, the domestic US auto industry might shrink modestly, with output contracting by -0.04%, potentially leading to about 500 job losses. However, without retaliation, they project a significant jump in US motor vehicle and parts production by almost 14%, potentially increasing employment by more than 150,000. Despite this potential upside in a no-retaliation scenario, overall GDP growth could still be lower, indicating that gains in one sector might be offset by losses elsewhere. Therefore, while protected sectors like domestic steel might see revenue gains of +5% to +15% or potentially higher, reliant industries like automotive could face job losses ranging from specific figures like 500 to potential percentage declines in production and employment.   

4. Trade and Retaliation:

• Trade Volume Reduction: The imposition of tariffs is intended to reduce imports, but their effect on overall trade volume, including exports, is more complex. Some economic analysis suggests that higher tariffs may not actually reduce the trade deficit and could even increase it. This is because while tariffs reduce imports, they also decrease the supply of dollars available to pay for those imports, leading to a higher dollar price and making US exports more expensive for foreign buyers, thus potentially reducing exports. Tariffs can also lead to reduced trade volumes by increasing the cost of imported goods and potentially dampening long-term economic growth. Bloomberg Economics analysis indicates that the new tariffs could reduce US imports by 15%. The initial market reaction to the announcement and implementation of tariffs also suggests a negative impact on trade-related economic activity, with major global companies experiencing significant market value erosion in the first quarter of 2025 and the S&P 500 closing the quarter lower. Based on these factors, a decline in imports in the range of 10% to 30% seems plausible, with figures potentially around 15%, as suggested by Bloomberg.   

Furthermore, implementing tariffs by one country often leads to retaliatory tariffs from its trading partners, decreasing exports. The US soybean industry provides a stark example of this, with exports to China plummeting after China imposed retaliatory tariffs in 2018, causing US farmers to suffer substantial losses. From 2018 to 2019, US farmers experienced $26 billion in losses due to China’s retaliatory tariffs. As of March 13, China, Canada, and the European Union had announced or imposed retaliatory tariffs targeting $190 billion of US exports, including agricultural products and American whiskey. For instance, the EU plans to reintroduce tariffs on a range of US goods, including jeans, bourbon, and motorcycles. A 25% US tariff on Europe could reduce the EU’s GDP by 0.33% in the short term due to a 19% decrease in exports. This illustrates the potential magnitude of export decline resulting from tariffs imposed by a major economy. Therefore, potential export drops due to retaliatory tariffs in affected sectors could range from 5% to 20% or even higher, particularly in sectors like agriculture and manufacturing that have been specifically targeted.   

• Probability of Escalation: The current global trade policy environment is characterized by escalating trade tensions, increasing the likelihood of further trade war escalation. The US has threatened 200% tariffs on alcohol products from the European Union in response to its proposed retaliatory tariffs, and both the EU and Canada have already announced tariffs on billions of dollars worth of US exports in response to US steel and aluminum tariffs. JPMorgan Chase has placed the odds of a potential recession in the second half of the year at roughly 30% due to the greater economic uncertainty surrounding trade. Historical precedents also suggest a significant risk of escalation. The trade war initiated by President Trump during his first term, particularly targeting China, led to immediate retaliatory tariffs and underscores the pattern of tit-for-tat actions in trade disputes. The Smoot-Hawley Tariff Act of 1930 is a stark historical example of how widespread tariffs can trigger retaliatory measures globally, leading to a significant contraction in world trade and exacerbating economic downturns. While the current situation is described as the second broadest tariff action since the 1930s, the experience of past trade conflicts, including the U.S.-Japan semiconductor conflict in the 1980s, demonstrates the potential for prolonged trade tensions and economic impacts. Analysis of the U.S.-China trade war of 2018-2019 indicates that such conflicts can lead to significant disruptions in trade flows and investment. Given the current trajectory of increasing tariffs, announced retaliatory measures, and historical patterns, the probability of further trade war escalation appears to be 40% to 70%.   

5. Macroeconomic Consequences:

• GDP Growth: The imposition of tariffs carries significant macroeconomic consequences, particularly concerning GDP growth. While the US economy showed a healthy growth rate of 2.4% in the fourth quarter of 2024, there is considerable uncertainty about sustaining this growth as tariffs take hold. Oxford Economics suggests that policy uncertainty, tariffs, and tightening financial market conditions are already weighing on growth in early 2025. J.P. Morgan Research has lowered its estimate for 2025 US real GDP growth by 0.3% to 1.6%, attributing this revision to heightened trade policy uncertainty and the effects of existing and retaliatory tariffs. They also believe a 40% risk of a global recession taking hold this year due to US trade policy. The IMF estimates that a universal 10% rise in US tariffs, accompanied by retaliation from the euro area and China, could reduce US GDP by 1% and global GDP by roughly 0.5% through 2026. Goldman Sachs has also raised US tariff assumptions and now expects the average tariff rate to increase by 15 percentage points in 2025, which they project will lower their 2025 GDP growth forecast by 0.5 percentage points to 1% on a Q4-to-Q4 basis (1.5% annual average) and increase the year-end unemployment rate. They now see a 35% probability of a US recession. The Tax Foundation estimates that the IEEPA and Section 232 tariffs will reduce US GDP by 0.4% before accounting for foreign retaliation. S&P Global Ratings estimates that if tariffs announced on Canada and Mexico remain in place through 2025, they could lead to a 0.6% lower US real GDP over the next 12 months. Looking at the longer-term impact, the Tax Foundation estimates that the 2018-2019 trade war tariffs reduced long-run GDP by 0.2%. The Yale Budget Lab projects that tariffs on China, Canada, and Mexico could reduce real GDP growth by 0.6% in 2025 and the long-run GDP level by 0.3-0.4%. Considering these various forecasts, the net effect of tariffs on US GDP growth appears to be between -1% and +0.3%, with a significant weight of evidence pointing towards a negative impact due to the conflicting sectoral impacts and the dampening effect on trade and investment.   

• Supply Chain Disruptions: Tariffs pose significant qualitative risks to supply chains, potentially leading to disruptions and inefficiencies. They can create supply chain bottlenecks by delaying the arrival of critical imported components, thus hindering production schedules. While tariffs aim to protect domestic manufacturers, they can also reduce the competitiveness of American goods in global markets, especially when other nations impose retaliatory tariffs, increasing export costs. To mitigate the impact of tariffs, companies may need to find new domestic suppliers or diversify their supplier base, leading to increased logistical complexities and potentially higher costs. The uncertainty surrounding tariff policies can also cause market volatility, with fluctuations in currency values and stock prices, making planning and investment decisions more challenging for manufacturers. New tariff policies can lead to ongoing disruptions, causing congestion at ports and other transportation hubs and increasing customs inspections and processing times. Recent tariff increases have already contributed to higher prices, supply chain disruptions, shipping delays, and logistical bottlenecks. Industries with delicate and global supply chains, such as automotive and apparel, are particularly vulnerable. Proposed tariffs can trigger sudden changes in supply and demand, create operational inefficiencies across established trade routes, and increase overall supply chain volatility, potentially leading to materials shortages and production delays.   

6. Political and Strategic Factors:

• Public Support: Public opinion on tariffs and protectionist measures presents a complex and somewhat divided picture. While President Trump labeled the enactment day of tariffs as “Liberation Day,” suggesting a positive framing, the broader public sentiment appears more cautious. Escalating tariffs are generally expected to cause further upheaval in global and domestic markets, which have already shown downward trends due to inconsistent trade approaches. Polling data indicates little overall support among working-class Americans for new tariffs, with only 23% favoring a “Trump-like option” involving a 10% global tariff and a sharp break with China. This option was particularly unpopular among young people, liberals, Democrats, and African Americans, while conservatives showed the highest support at 38%, still a minority. A Cato Institute poll reveals that initial support for tariffs often plummets when Americans are confronted with the reality of higher prices. Navigator Research found that tariffs are viewed unfavorably by a 19-point margin, with a plurality of Americans opposing the implementation of new tariffs, including independents. While there is more division on tariffs specifically targeting products from China, a majority across party lines believe that new tariffs would cause costs to increase. The Elon University Poll supports this, with most Americans anticipating rising costs due to import tariffs. However, a stark partisan divide exists in how these impacts are perceived. Synthesizing these trends suggests that while protectionist-leaning demographics might have pockets of support, potentially in the range of 30% to 40%, overall public support for new tariffs is limited and highly sensitive to potential price increases.   
• Geopolitical Goals: The implementation of tariffs is often framed within the context of broader geopolitical and strategic objectives. The White House argues that the new round of tariffs, including those potentially targeting copper imports, must counteract China’s unfair trade practices and reduce US dependence on adversarial nations. However, this rationale is not universally applicable across all sectors. For example, the US sources approximately 45% of its copper from allied nations like Canada, Chile, and Peru, making tariffs on these imports counterproductive to reducing reliance on adversaries. A copper tariff would likely increase costs for industries essential to national security, including semiconductor manufacturing, defense systems, and renewable energy. More broadly, tariffs create an urgent need for supply chain agility, and companies with diversified sourcing options will be better positioned to respond quickly, potentially reducing reliance on any single, potentially adversarial source. Historically, the US administration has also used tariffs as a tool in negotiations with various trade partners, including India, the EU, and other key countries, often striking deals that eliminated potential tariffs but creating uncertainty in the process. Therefore, while tariffs are intended to align with geopolitical goals such as reducing reliance on specific suppliers, their effectiveness and strategic implications can vary significantly by sector and may even undermine other strategic objectives if not carefully targeted.   

7. Long-Term Scenarios:

• Industry Adaptation: The long-term impact of tariffs on domestic industries will depend on their ability to adapt and grow and the potential for inefficiencies arising from reduced competition. Tariff policies are often intended to provide short-term protection, allowing domestic industries to develop and become more competitive. When tariffs successfully redirect demand to domestic producers, they can temporarily increase GDP, especially if idle capacity exists. Some historical examples suggest that tariffs and strategic industrial policy may catalyze long-term economic transformation. For instance, the reimposition of steel tariffs is anticipated to stimulate US steel production, potentially leading to the reopening of facilities and expansion of existing plants. US steel producers may also gain more control over pricing, leading to higher profit margins and increased revenues, which could be reinvested in capacity growth. However, tariffs also carry significant risks of long-term economic inefficiencies. By shielding domestic industries from foreign competition, tariffs may reduce the pressure on firms to innovate and improve efficiency, potentially leading to complacency and slower productivity growth. They can also lead to misallocating economic resources, encouraging investment in protected industries that may not be naturally competitive while discouraging investment in more productive sectors. While domestic capacity growth in sectors like steel might increase by +10% to +25% over the next five years due to tariffs, there are substantial risks of inefficiency arising from reduced competition and potentially higher input costs for other manufacturing industries that rely on these materials.   
• Global Norms: The long-term impact of tariffs on global trade norms and the credibility of multilateral trade agreements like the WTO is a significant concern. After World War II, tariffs largely fell out of favor in advanced economies because they often led to reduced trade, higher prices, and retaliation. Some experts argue that the WTO’s credibility has been damaged by President Trump’s and President Biden’s decisions to impose tariffs unilaterally, bypassing the WTO’s framework. WTO members are supposed to keep their tariffs below agreed levels, and the unilateral imposition undermines this multilateral framework. High US tariffs represent a major policy reversal, as many agricultural imports currently have low or zero tariffs, particularly from countries with free trade agreements with the United States. The US announcement that it will impose so-called reciprocal tariffs suggests a lack of interest in the multilateral trade order and a potential move towards a “beggar thy neighbor” policy, which would violate fundamental WTO rules like the most-favored-nation clause. While some argue that Trump’s tariff policies could paradoxically lead countries back to multilateralism as a response to unilateral actions, the immediate impact is a clear undermining of WTO credibility and a move away from established global trade norms. The long-term impact could be weakening the rules-based international trade order and a greater reliance on bilateral agreements or unilateral actions, increasing uncertainty, and potentially leading to more frequent trade disputes.   

8. Conclusion:

Synthesizing the available research and analysis, implementing widespread tariffs carries significant economic risks. In the short term (within the next 1-2 years), the probability of net negative consequences is high, estimated at approximately 65%. This is primarily driven by the likelihood of increased consumer prices across a wide range of goods, a reduction in overall trade volume due to tariffs and retaliation, and a drag on GDP growth as projected by numerous economic institutions. The risk of escalating trade wars further exacerbates these short-term negative prospects.   

However, long-term benefits (over the next 5-10 years) are possible, estimated at around 35%, but this is contingent upon several factors. If the revenue generated from tariffs is strategically reinvested in key domestic industries, fostering innovation, efficiency, and capacity growth, and if global trade tensions eventually de-escalate, leading to a more stable international trade environment, then some long-term benefits might materialize. This would require a sustained commitment to industrial policy beyond mere tariff protection and a shift away from unilateral trade actions that undermine global norms. Without strategic reinvestment and resolving trade disputes, the long-term is also likely characterized by continued inefficiencies, retaliatory trade barriers, and a weaker global trade system.