Since Donald Trump became President, he introduced many tariffs (import taxes) on certain countries (like China) and products (like steel, aluminum, electronics, etc.).His goal was to protect U.S. businesses and jobs by making foreign goods more expensive — so Americans would buy more “Made in USA” products instead.
Auto tariffs could impact growth and inflation
The U.S. government has announced a 25% tariff on imported vehicles and auto parts, which will take effect on April 2. This new trade policy is expected to increase costs for consumers. If automakers decide to pass these additional expenses on to buyers, the average price of light vehicles in the U.S. could rise by approximately 11.4%.
Under the new policy, nearly all car manufacturers are expected to face strong pressure to increase prices. This could give domestic automakers a better opportunity to raise their prices as well, helping them cover the impact of tariffs without worrying much about losing market share.
Following the announcement of auto tariffs, updated economic forecasts now predict a 0.2 percentage point decline in U.S. GDP, bringing the annual growth estimate down to 1.3%. Inflation is also expected to rise, with Personal Consumption Expenditures (PCE) price inflation for 2025 projected to reach 2.7%, and core PCE inflation estimated to increase to 3.1%.
The decline in economic growth and the rise in inflation have created a difficult situation for the Federal Reserve. While interest rates may remain unchanged for now, unless the job market weakens, the increasingly tough business environment raises the possibility of such a downturn. Future decisions on rate cuts will likely depend on upcoming employment data.
U.S. GDP Growth Forecast Lowered Due to Tariff Impact
The forecast for U.S. real GDP growth in 2025 has been lowered to 1.6%, reflecting a 0.3% decrease from earlier estimates. This adjustment comes amid growing uncertainty surrounding trade policies, which is expected to dampen overall economic activity—particularly in areas like capital investment and business spending.
In addition to the economic slowdown, existing tariffs are projected to push consumer prices higher, adding approximately 0.2 percentage points to overall inflation. On top of that, retaliatory tariffs from other countries could further hinder the economy by slowing down export growth.
President Trump imposes 25% tariffs on steel and aluminum
A series of new tariffs have been introduced on specific imports such as steel, aluminum, and automobiles, aiming to protect domestic industries. However, their implementation has faced several delays and reversals, making the situation quite uncertain. The most recent move includes a 25% tariff on imported autos and parts, expected to increase vehicle prices significantly—by up to 11.4% in some cases. As a result, inflation projections have been adjusted upward, and GDP growth estimates for the year have been revised downward to 1.3%. Higher consumer prices and economic slowdown are anticipated side effects of this updated trade approach.
The economic impact extends further with earlier tariffs contributing to inflation and causing uncertainty in investment and exports. Real GDP growth for the year is now projected to be 1.6%, down from earlier forecasts, as foreign retaliation and reduced capital spending take a toll. The 25% tariffs on steel and aluminum imports are expected to raise the cost of a wide range of goods, from vehicles to packaged products. This mirrors previous actions from earlier years, which increased domestic production but also led to price hikes and foreign countermeasures. Overall, these policies are reshaping the trade landscape while posing new challenges for economic stability.
The risk of a global recession rises to 40%
The likelihood of a global recession occurring this year has increased to 40%, up from 30% earlier in 2025. This rise is largely attributed to recent changes in trade policies, particularly those involving tariffs. The altered approach to implementing tariffs, along with the potential negative effect on overall market sentiment, is seen as a major factor driving the elevated risk of economic downturn.
Reciprocal tariffs could be substantial if foreign taxes are targeted
Reciprocal tariffs aim to match the import duties of the U.S. with those of its trading partners. While average tariffs between the U.S. and other developed nations are generally low, making direct reciprocation seem minor, the proposed inclusion of broader foreign taxes—such as value-added taxes and digital service taxes—could significantly amplify the effect. If these additional taxes are factored into tariff calculations, the resulting economic impact could be much larger.
Even though individual agreements might reduce the severity on a country-by-country basis, the initial impact could still be substantial. Implementing such a strategy could potentially increase the average U.S. tariff by around 12 percentage points, pushing it above 20%, which would likely lead to notable effects on both inflation and economic growth.
Consumers could face higher prices as a result of tariffs
Tariffs tend to affect end consumers in the U.S., as they often result in higher prices for imported products. Essentially, tariffs act as a tax on goods coming into the country. The degree to which these taxes increase consumer prices depends on factors like how sensitive demand is and how currency values shift. Still, the burden typically lands on domestic sellers and buyers rather than foreign exporters.
During the 2018–2019 period, exporters from China largely maintained their pricing despite a weaker yuan compared to the dollar. Although inflation didn’t spike dramatically at the time, later research showed that import prices rose nearly in full proportion to the tariffs, and much of that cost was ultimately transferred to consumers.
In comparison, the current tariff proposals are broader and more aggressive than those earlier measures, and today’s inflation environment adds further complexity.
Tariffs rattle business confidence
The February flash services PMI, which gauges the health of private sector businesses in the U.S., dropped below the 50 mark for the first time in two years — a signal of weakening business confidence. Similarly, sentiment among homebuilders declined, as reflected in the NAHB housing market index, which measures current and expected single-family home sales. The index fell from 47 to 42 in February.
With tariff talks appearing to move from border-related issues to deeper economic matters, the chances of certain tariffs being implemented — and possibly remaining in place for an extended period — seem to be rising. Recent drops in confidence indicators and a late-week dip in stock markets point to a growing awareness of these emerging risks.
US tariffs and trade policy could have a material impact on the global economy
Growing worries about trade disputes can directly influence economic activity. Economic models consistently indicate that tariffs lead to reduced growth, and real-world analysis of the 2018–19 U.S. trade tensions shows that the burden of tariffs mainly fell on American consumers, weakening both domestic and global economic performance. The main way tariff policies affect the economy is through sentiment — earlier this year, both markets and surveys viewed trade policies as supportive of business. However, there’s now a noticeable decline in confidence as companies and households re-evaluate the situation, which could significantly increase the economic toll of tariffs.
The International Monetary Fund (IMF) estimates that if U.S. tariffs were to increase by 10% across the board — and similar measures were taken in response by the euro area and China — U.S. GDP could shrink by 1%, while global GDP may fall by about 0.5% by 2026. About half of this projected economic slowdown would result from a drop in confidence tied to growing trade policy uncertainty.