The international economic environment could face significant disruption if the United States implements considerably higher tariffs, particularly in a scenario where former President Donald Trump regains office and enacts his proposed trade measures.
Analysts at Goldman Sachs warn that such tariff increases could have widespread effects on global economic growth, inflation, and monetary policies across various regions.
In a potential scenario outlined by Goldman Sachs, the U.S. might impose a 10 percentage point tariff on all imports and increase tariffs on Chinese goods by nearly 20 percentage points.
These measures would sharply elevate the effective tariff rate on U.S. imports, particularly from China, leading to widespread global repercussions. Other countries might retaliate, potentially igniting a global trade conflict.
Should these tariffs be enacted, the U.S. could see price levels rise by over 1%, while the country’s GDP could contract by just over 0.5%. The inflationary impact would stem from both direct cost increases in consumer goods and intermediate products, as well as indirect effects such as the appreciation of the U.S. dollar, which would make imports more expensive.
Morgan Stanley analysts estimate that global prices could rise by 0.5%, with more significant increases expected in Canada, Mexico, and other emerging markets, and smaller impacts in the Eurozone, UK, and other developed markets.
Higher tariffs could slow global economic growth, with the most severe effects felt outside the United States. As import costs rise, real incomes and consumer spending could decline, leading to reduced business investment due to heightened uncertainty. Global GDP could shrink by approximately 0.9% as a result.
While some countries like Mexico, Vietnam, and Cambodia might temporarily benefit from supply chain shifts, these advantages are likely to be overshadowed by the broader negative impacts on global trade and economic stability.
The inflationary effects of increased U.S. tariffs are expected to vary across different regions, with the U.S. experiencing a more pronounced impact. The Federal Reserve might delay interest rate cuts in response to rising inflation, while other central banks, particularly in Europe and developed markets, might adopt more accommodative policies to counteract the slowdown in growth.
Analysts suggest that the impact of these tariffs could lead non-U.S. central banks to ease their policies by over 100 basis points on average, exceeding the Federal Reserve’s adjustments.
The divergence in monetary policies could cause significant fluctuations in exchange rates, especially with a stronger U.S. dollar. Higher import prices could further drive inflation, particularly in economies heavily reliant on dollar-denominated trade, such as those in emerging markets.
