This is our first take on the new tariffs that were announced yesterday, dubbed by President Trump as "Liberation Day".  This is a rapidly evolving situation, and what follows is a preliminary assessment. We expect to share the implications in greater depth in one week's time, as details continue to emerge and as trading partners respond.

The scope and size of President Trump's new tariffs exceeded most expectations.   He announced that his administration will impose a universal 10% tariff rate on all imports from all of U.S. trading partners beginning April 5. In addition, the 60 "worst offenders" (according to the administration), which are countries deemed to have onerous trade barriers (tariff and non-tariff) to their markets, will have their own (higher) reciprocal tariff rates added to current rates (for instance, 34 percentage points added to already existing 30%+ tariffs on Chinese imports) starting on April 9 (see table in Appendix). Rates in this category vary widely, with some reaching as high as +50% (Lesotho).

The implied average effective tariff rates (AETRs) on U.S. imports will increase sharply. We estimate that they will rise to range 20%-25%, from 2.3% in 2024 reaching levels not seen since 1930s (chart 1).   The upside risk to the AETR assumption underlying our March baseline for the U.S. forecast update has now materialized, assuming the new rates stay at least through the year. Our March forecast assumed AETR of little above 10%. Our upcoming forecast update will assume the new AETR.

Chart 1

According to our calculations, the country-specific tariffs announced on April 2 were equivalent to an AETR (an import weighted tariff rate) of approximately 21%.

For China, the new additional tariffs on top of earlier tariffs take the overall tariffs to over 60%+ (20 percentage points added in the first quarter, on top of already existing 10%+ in 2024).

For Canada and Mexico:

• The existing fentanyl/migration IEEPA orders remain in effect, which means imports from both countries compliant with USMCA (estimates suggest approximately 60%) are subject to 0% tariffs;
• Imports not compliant with USMCA are subject to 25% tariffs;
• Imports of energy or energy resources and potash imported from Canada not compliant with USMCA are subject to 10% tariffs.
• In the event the existing fentanyl/migration IEEPA orders are terminated, imports from both countries compliant with USMCA are subject to 0% tariffs; imports not compliant with USMCA are subject to 12% tariffs.

Additionally, yesterday's announcement ends duty-free treatment for small-scale imports from China, including e-commerce shipments valued under $800, effective May 2. Taken together, the tariffs on Canada and Mexico are not materially different from what we assumed (10%) in our March baseline.

Chart 2

There were product-specific carve-outs from "Liberation Day" tariffs--some that have already been announced and some under consideration for future tariff announcements.  Strategic sectors, including semiconductors, refined copper, processed lumber, and selected pharmaceuticals, were explicitly excluded from yesterday's tariff announcement. But it is quite likely these products, critical to national resilience, will face tariffs ranging between 10% and 25% sooner than later. However, the earlier announced 25% product-specific tariffs on steel, aluminum, and autos remain unchanged (our reading suggests no stacking on top). Auto parts—engines, transmissions, and electronic components—will be newly subjected to tariffs starting May 3, providing companies a brief period to reorganize supply chains or seek exemptions. Our March forecast update assumed 25% tariffs on steel and aluminum already, but will now revise up our 10% tariffs on all other above-mentioned strategic sectors to 20%-25%.

U.S.

The share of import content in U.S. consumer spending would limit the new tariffs' impact on U.S. consumer prices, but it would still be substantial in the near term.   The impact on inflation in the near term will be significant, likely averaging closer to 4% by fourth quarter (compared with 3% in our March baseline forecast). Given that the 11% share of consumer spending is represented by imported goods, the additional import cost would add 0.7%-1% to the CPI price index level from our earlier forecast (assuming the 50%-75% pass-through to consumers). Assuming there are no major second-round effects, inflation numbers should be headed back to the 2% target by mid-2026.

The impact on GDP depends on retaliation by trading partners and how the tariff revenues get used.   Tariffs are a regressive tax. They will hit lower-income households more as a share of their spending. Erosion of purchasing power, worse equity market conditions, and elevated investment uncertainty are likely to further weaken growth. What will be done with the tariffs collected is equally important for the trajectory of GDP beyond the initial shock. The impact on GDP would depend on whether the revenues get recycled in the form of tax cuts to consumers or in some other form of givebacks. Still, under a scenario of such recycling and a relatively modest retaliation, our sense is that quarterly real GDP growth on a year-over-year basis is likely going to bottom out by a three-tenths to four-tenths of a percentage point lower than our March forecast of 1.6% in the next 12 months. (Although on a "static" basis, tariff revenues would amount to $700 billion - $800 billion in the first year, or 2.3%-2.7% of GDP, it is more likely that revenues will be much less than that as imports will decline and non-tariff revenues will also suffer from weaker growth.)

Recession probability?   We still don't see a NBER-defined recession (depth, duration, and broad dispersion of weakness, not just two consecutive quarters of negative growth) in the next 12 months, but we acknowledge that the subjective probability of a recession within that time period has now likely moved up to 30%-35% from 25% in March.

The Fed is likely going to hold its policy rate steady for most of the year, even though standard Taylor-rule like prescriptions would suggest rate hikes.   Our sense is that the Fed would choose to stay put, given downside risks to employment, even as inflation moves up. For now, we continue to assume one rate cut of 25 basis points late in the year, as employment growth weakens enough for the Fed to look past tariff-led cost-push inflation. In a downside scenario where consumer spending and labor demand fall sharply, we would expect the Fed to cut rates aggressively.

Rest Of The World 

The higher U.S. tariffs on goods imports are more severe in scope and size than those included in our baseline scenario published last week. In terms of directional guidance, we forecast lower GDP growth forecasts and policy rates for the most part, although these may both vary significantly across economies.

Growth.   We are likely to revise downward our GDP growth forecasts relative to our existing baseline. In terms of magnitudes, we would note the following:

Large economies such as the eurozone and China are likely to see smaller adjustments to their growth rates, bounded at around one-fourth percentage point per year. Europe will still see upside from higher infrastructure and defense spending from 2026.

More open economies that depend on trade for growth are likely to see larger adjustments to their growth rates, particularly if they trade heavily with the U.S. This is the case, for example, of Ireland and Switzerland in Europe and the Tiger economies in Asia-Pacific. Canada escaped much more lightly than feared for the time being. Still, the auto tariffs, steel and aluminum tariffs, the ongoing uncertainty about the tariff policies, and weaker U.S. growth will keep growth well below potential in 2025. The escape hatch-- if Mr. Trump decides that Canada has appeased border and drugs trafficking concerns—is one of a weighted average tariff rate lower than 10%.

Latin America is subject to relatively lower reciprocal U.S. tariff rates than those announced on other economies. For the region's economies, the main impact on GDP will come from the impact of weaker global demand.

Policy rates.   We also anticipate changes to policy interest rates. Again, these will be differentiated. Central banks in economies that are larger, more domestically led and less reliant on dollar-denominated financing will have more latitude to cut rates in response to slower growth. For example, we can envisage one additional cut by the European Central Bank this year. In contrast, central banks in smaller, more open, and more dollar-reliant economies will be more constrained by what the Fed does. For those central banks in vulnerable economies with less well anchored inflation expectations, rates may have to rise to protect the balance of payments.

Retaliation.   Finally, we expect U.S. trading partners to respond to the latest round of tariffs. We forecast these countermeasures playing out over the coming weeks. We think they will be targeted at perceived vulnerable U.S. industries (and political districts) rather than broad-based. We are also expecting in some cases non-tariff measures as well as measures effecting services as well as goods flows. These potential countermeasures would put further downside pressures on growth.

We plan to issue a full set of revised macro forecasts in one week's time.  

Table 1