The global economic effects of Trump's 2025 tariffs

A new paper models the economic implications of President Trump's 'Liberation Day' tariffs across five scenarios, concluding they significantly reduce US and global economic growth and increase inflation. While less severe than initially projected due to exemptions, notably for Canada and Mexico under USMCA, foreign retaliation exacerbates these losses, disproportionately impacting US agriculture and durable manufacturing. The most adverse scenario includes dollar depreciation and capital outflow, further accentuating US employment and income declines.

Analysis

A Peterson Institute for International Economics paper models the material economic impact of President Trump's proposed 'Liberation Day' tariffs, concluding they are a net negative for both U.S. and global growth while being inflationary. The analysis highlights that the ultimate economic damage is contingent on the policy specifics and international reactions. Initial tariff proposals have been moderated by exemptions, particularly for Canada and Mexico under the USMCA, lessening the blow compared to the original announcements. However, the models show that retaliatory tariffs from other nations would significantly amplify economic losses. The U.S. agriculture and durable manufacturing sectors are identified as being disproportionately vulnerable, facing reduced output, lower employment, and higher prices. The most adverse scenario projects that high tariffs coupled with foreign retaliation could trigger a loss of confidence in U.S. assets, leading to dollar depreciation, capital outflows, and higher long-term interest rates, which would further depress U.S. employment and income.

Key Decisions for Investors

• Investors should review exposure to U.S. agriculture and durable manufacturing sectors, as the analysis identifies them as being disproportionately at risk from reduced output and employment.
• The potential for dollar depreciation and capital flight in a retaliatory tariff scenario warrants consideration of diversifying asset allocation toward non-U.S. holdings as a hedge.
• Given the inflationary pressures highlighted in all scenarios, portfolios should be assessed for resilience to rising price levels and interest rates.
• Actively monitor geopolitical developments, as the degree of foreign retaliation is the key variable determining the severity of the negative economic impact.