U.S. President Trump has followed through on imposing tariffs on major trading partners.

S&P Global Ratings thinks that the economic impact of the 25% tariffs on goods imports from Canda and Mexico (except autos and Canadian oil and gas) will be much smaller for the U.S. (in own country percentage terms) than for Canada and Mexico. In our new baseline forecast, the level of GDP falls by around 0.6% in the U.S. over the next 12 months and by 2%-3% in Canada and Mexico compared with our baseline forecasts from November 2024.

Our new baseline forecasts for China--now incorporating the U.S.'s additional 10% tariffs on imports from China--are largely unchanged from our November 2024 forecasts due to offsets explained below.

We confirm our view that there are no winners in a trade war. The U.S.-instigated tariffs and trading partner counter-tariffs will lead to across-the-board lower GDP growth, higher unemployment rates, and higher inflation. These effects are larger for relatively smaller and relatively trade-dependent economies. Policy rate outcomes are mixed with emerging markets central banks likely to keep rates higher to keep inflation expectations anchored.

Our new forecasts are a transitional baseline that will serve as a bridge to our full macro update due at the end of March. (These forecasts borrow heavily from our "what if" scenario in "Macro Effects Of Proposed U.S. Tariffs Are Negative All-Around," published on Feb. 6, 2025.)

Tariff Update

Effective March 4, goods imports from Canda and Mexico will face 25% tariffs (except for autos and Canadian oil and gas). These amount to $919 billion of $3.3 trillion value of goods imported into the U.S. in 2024. Canada responded by imposing 25% tariffs on imports from the U.S. valued at C$30 billion, with a further 25% on C$125 billion promised in three weeks. Mexico will announce its counter-tariffs this weekend.

At the same time, the U.S. administration announced additional tariffs on China. Effective March 4, an additional 10% tariff will be levied on goods imports from China. This is on top of the 10% tariff imposed one month ago and levies imposed during the first Trump administration. These goods amount to $439 billion in 2024. China's response consisted mainly of imposing 10%-15% tariffs on some agricultural imports from the U.S.

Also enacted were 25% tariffs on imports of steel and aluminum.

Reciprocal tariffs are under study as well, and a decision is expected in early April 2025. The Trump administration announced last month the "Fair and Reciprocal Plan" that will seek to "correct longstanding imbalances in international trade and ensure fairness across the board."

Our New Transitional Baseline

Starting with North America, the impact on the U.S. economy (in own country percentage terms) is much lower than for Canada and Mexico. This result is not surprising given the asymmetry in both overall size and in trade dependencies as a percentage of GDP. The U.S. also enters 2025 in a stronger cyclical position than its neighbors with solid, resilient demand momentum. (January was an exception, affected by a one-off weather hit and import front-running.)

For China, the economic effects compared with our previous baseline are minimal. Still, the ongoing U.S. tariffs are the key reason we expect GDP growth to slow to around 4% in 2025 and 2026

Europe was not in scope for the latest round of U.S. tariffs. Nonetheless, we provide an update reflecting second-order effects of tariffs as well as recent macro developments.

While it seems increasingly likely that Europe will not escape higher U.S. tariffs, for the time being, they are less likely than for other regions. As a reminder, a 10% across-the-board tariff increase on U.S. imports of European goods would shave 0.2% off euro area GDP by 2026 (see table).

The announced 25% tariff hike on steel and aluminum does not move the macro needle much for Europe either. China has replaced the U.S. as the top export destination for this sector.

U.S.

The overall drag on U.S. real GDP (versus our previous baseline) is difficult to pin down without making very strong assumptions. Our sense is that real GDP will likely be about 0.6% lower over 12 months, reflecting purchasing power loss to U.S. households, elevated investment uncertainty, and a hit to American exporters. The additional 10% tariff on Chinese imports starting in March (and the countermeasures by China) likely offsets the stronger-than-expected growth heading into 2025.

The new tariffs are likely to temporarily boost U.S. consumer price index (CPI) inflation by 50 basis points-70 basis points, as a first approximation. Currency adjustment, product substitution, or cost absorption along the supply chain from the exporter to final consumer offers some price relief, but any relief is probably going to be limited. CPI inflation will likely stay close to 3% through 2025.

In such an environment, we suspect the Fed would likely err on the side of keeping inflation expectations anchored. The pause on the Fed's rate easing cycle would come earlier than we currently anticipate. We suspect there would be no rate cuts this year, and it would likely resume the downward journey to a neutral fed funds rate in 2026.

Canada

Combining the hit to exports, purchasing power of Canadian households, and erosion of investment outlays (which are closely correlated with exports and most capital goods are imported), we expect GDP to decline by 2.5% in the next 12 months compared with our previous baseline. The reaffirmation of the United States-Mexico-Canada Agreement (USMCA) partially unwinds the negative gap in the second half of 2026.

At the same time, consumer prices could rise about 50 basis points above our previous baseline. Vehicle costs are particularly susceptible. Amid such weak macro conditions, the Bank of Canada is likely to cut policy rates more to support the economy--looking through the inflationary impulse as a one-off temporary outcome. We see the Canadian dollar weakening by another 10% against the U.S. dollar, with further downside risk as the central bank cuts rates to accommodate weakening economy.

Taking into account the imported goods content in the CPI (which is about 30%) and weaker demand by consumers, overall consumer prices are likely going to rise 2.7% by the fourth quarter of 2025, compared with 2% in our November baseline.

Mexico

Our view is that Mexican officials will likely continue to be pragmatic in their negotiations with U.S. officials, to lessen the duration of tariffs. However, if tariffs were to stay in place for some time (months or quarters, not weeks), the impact on the Mexican economy would be significant.

Assuming that tariffs are in effect throughout 2025, we estimate Mexico's GDP would contract 0.5% this year (1.7% below our pre-tariff baseline). We assume the exchange rate will depreciate about 10%, which will absorb a large portion of the higher export costs associated with the tariffs. The main drag on growth will be through lower investment and consumption.

Assuming the exchange rate depreciates about 10%, this would add about 90 basis points to inflation, and could prompt the Mexican central bank to temporarily pause its interest rate cutting cycle to re-anchor inflation expectations. If the exchange rate does not depreciate significantly, but growth expectations decline, the central bank may instead accelerate its easing cycle.

Key will be whether tariffs are seen as a precursor to a material long-term change in the trade relationship between the U.S. and Mexico. The USMCA comes under review next year and may be subject to changes. For now, we expect the USMCA to be reaffirmed, remaining a key anchor of the U.S.-Mexico trade relationship. If that is not the case, then Mexico's long-term growth prospects will come under significant downside pressure.

China

The additional 10% U.S. tariffs are an obvious negative for China's growth. We had incorporated 10% tariffs in our November baseline. The extra levies will mean lower exports and investment, and other spillover effects.

However, that further drag on growth is offset by two recent developments. First, growth at the end of 2024 was better than expected because of policy support, tentative bottoming out of the property sector, and strong exports. The stronger momentum helps push up 2025 growth. Second, during the National People's Congress annual session, held this week, the government confirmed a relatively ambitious 5% growth target and committed to more fiscal stimulus than we had expected in November.

In all, we broadly keep our GDP growth forecast unchanged. We project 4.1% growth in 2025--substantially less than the government's target--and 3.7% in 2026. But we now expect less export growth and stronger domestic demand.

The additional tariffs will amplify downward pressure on prices. Meanwhile, higher-for-longer U.S. policy rates imply a weaker currency. Amid unwelcome foreign-exchange market depreciation, we expect the People's Bank of China to cut its policy rate by 20 basis points less in 2025 than we assumed previously.

U.S. Policy-Driven Downside Risks Are Material, And Not Going Away

Forecasting U.S. tariff policy is complicated by everything being on the table. Beyond Canada, Mexico, and China, tariffs could be applied to other jurisdictions, including political allies and countries the U.S. has a free trade agreement with. This group could include the eurozone or single member countries of the EU, as well as the many Asian countries with significant bilateral trade surpluses with the U.S.

Forecasting tariff duration--and the duration of the macro impact--is a challenge as well. This is complicated by competing objectives in an underdetermined system. Clearly defined objectives for tariffs are generally lacking, with targets including rectifying trade imbalances, lowering illegal immigration, reducing the flow of illegal drugs, and increasing defense spending. If targets are not well defined, then progress is difficult to gauge, and the ending of tariffs is difficult to forecast.

Uncertainty around U.S. tariff policy--and U.S. policy more generally--has spiked to levels seen only during the pandemic and the global financial crisis. Should these uncertainties cause companies to hold back investments and households to hold back durable goods spending, the result would be lower demand and lower growth. If large enough, these effects would derail our long-standing soft-landing baseline (see chart).

We will be watching this situation closely, focusing on the nexus between consumer spending and the labor market, which has been surprisingly resilient in the wake of steep interest rate hikes.

Related Research

• Asia-Pacific Economies Likely To Be Hit By U.S. Trade Tariffs, Feb. 23, 2025
• Interest Rate Forecasts For Key Emerging Markets Revised Following Recent Change To The U.S. Rate Forecast, Feb. 18, 2025
• Announced Steel And Aluminum Tariffs Would Mean Little Change For U.S. GDP And Prices, Bigger Risks For Downstream Users, Feb. 12, 2025
• How Might Trump's Tariffs--If Fully Implemented--Affect U.S. Growth, Inflation, And Rates?, Feb. 6, 2025
• Macro Effects Of Proposed U.S. Tariffs Are Negative All-Around, Feb. 6, 2025
• The Fed Is In Limbo, Jan. 30, 2025
• Which Sectors Would Be Most Vulnerable To U.S. Tariffs On Canada And Mexico?, Jan. 30, 2025