Trump’s expectations from the reciprocal tariff announcement assume that higher tariffs on imports will restore the competitiveness of domestically produced goods in the US and therefore help growth and employment in the domestic economy. The reality could be far more complicated than this because of various possibilities. Let us look at them one by one.
While the US is the largest importer in the world, it is also the second largest merchandise exporter in the world. If major importers of US products decide to retaliate against US tariffs – countries and groups such as China and the EU have indicated they could – then US exports could also lose their competitiveness in other foreign markets neutralising a large part of the expected gains from the tariffs.
Another route through which the so-called gains of the tariffs could get neutralised is by an increase in prices of imported goods in the US. A lot of commodities imported by the US cannot be produced by the country or can only be produced at a much higher cost. This makes it unlikely that the US will be able to manufacture these things at home and keep the prices closer to import levels. This is bound to lead to a situation where US consumers end up paying higher prices for these commodities and therefore are left worse off.
While Trump has been careful to exempt some commodities from his tariffs, US manufacturers could also face price pressures because of a rise in prices of imported components from countries which now face higher tariffs. For example, Indian auto component exports to the US will now face a much higher tariff . Unless their buyers in the US can find cheaper sources of securing the same inputs, they will have to absorb or pass on the prices.
{{/usCountry}}While Trump has been careful to exempt some commodities from his tariffs, US manufacturers could also face price pressures because of a rise in prices of imported components from countries which now face higher tariffs. For example, Indian auto component exports to the US will now face a much higher tariff . Unless their buyers in the US can find cheaper sources of securing the same inputs, they will have to absorb or pass on the prices.
{{/usCountry}}In fact, headwinds to US growth could emanate from a purely sentiment-driven perspective. Because Trump’s actions, some of which are often taken back or changed, have created a large policy uncertainty, investors and consumers are likely to be much more cautious in their decisions which could trigger a vicious cycle in the economy where low demand and low investment feed into each other.
In light of heightened trade policy uncertainty, JP Morgan Research has raised the probability of a global recession taking hold in 2025 to 40% — up from 30% at the start of the year. “We now see a materially higher risk of a global recession. The administration’s shift in the application of tariff policy and the potential impact on sentiment have contributed to this increased risk,” said Bruce Kasman, chief global economist at JP Morgan in a research note published on March 31.
And that was before the tariffs were announced.
To be sure, any slowdown in US growth is bound to weight down on global growth as well. A long-term comparison of the US and the rest of the world’s growth shows that the two have a strong positive correlation.