Unpacking the global impact of higher US tariffs

The global economic landscape faces a potential upheaval with the prospect of significantly higher U.S. tariffs, especially under a scenario where former President Donald Trump returns to office and implements his proposed trade policies.

As per analysts at Goldman Sachs, these higher tariffs could have profound impacts on global growth, inflation, and monetary policies across different economies.

Goldman Sachs outlines a scenario where the U.S. could impose a 10 percentage point tariff on all imports and a nearly 20 percentage point increase in tariffs on goods from China.

This would significantly raise the effective tariff rate on U.S. imports, especially from China, with global repercussions. If implemented, other countries are likely to retaliate, potentially leading to a global trade war.

In this scenario, U.S. price levels could rise by over 1%, and the country’s GDP could decline by just over 0.5%. This inflationary pressure would result from direct increases in the cost of consumer goods and intermediate products, as well as indirect effects like U.S. dollar appreciation, which could make imports more expensive.

“Taken together, we estimate a 0.5% uplift to global prices, with more upside in Canada, Mexico, and other EMs, and less upside in the Euro area, UK, and other DMs,” said analysts at Morgan Stanley.

Tariffs could slow global growth, with the most significant impacts felt outside the United States. Higher tariffs would increase import costs, reducing real incomes and consumer spending. This could also stifle business investment due to increased uncertainty. Global GDP might shrink by 0.9% as a result.

While some countries like Mexico, Vietnam, and Cambodia may temporarily benefit from supply chain reallocation, these gains are likely to be outweighed by the overall negative impact on global trade and economic stability.

The inflationary effects of higher U.S. tariffs are expected to vary across regions, with the U.S. seeing a more significant inflationary impact than other economies. The Federal Reserve might delay rate cuts in response to higher inflation, but other central banks, especially in Europe and developed markets, may adopt more dovish stances to counteract the growth slowdown.

“A simple illustrative Taylor rule implies that the incremental impact of tariffs could lead non-US central banks to ease policy by over 100bp (on average) in excess of the Fed,” the analysts said.

Different monetary policies could lead to significant changes in exchange rates, especially with a strengthening U.S. dollar. Higher import prices could further fuel inflation, particularly in economies with high exposure to dollar-denominated trade, such as emerging markets.