Tariff Tsunami: How could Donald Trump's reciprocal tariff policy trigger world recession, hit US economy hard?

With the US reeling under a current account deficit of $1.2 trillion in 2024, President Donald Trump announced a reciprocal tariff regime that may impact 180 countries. From the Australian territory of Norfolk Island with a population of 2,000 and zero exports to the US to China with a population of 141 billion and exports to Washington worth $400 billion, no country is spared. From the minimum base tariff of 10% on the UK to the effective tariff of 54% on Beijing, Donald Trump has put enough sand under the wheels of the world economy. 

Why did Donald Trump impose reciprocal tariffs?

While the US exports goods worth $3,191.6 billion, it imports products worth $4,110 billion, absorbing a trade deficit of $918.40 billion in 2024. It was 1975 when the US earned an overall trade surplus. 

Trump’s philosophy of reciprocal tariffs is based on the belief that trade partners will be forced to slash tariffs on US goods in their respective countries, while an increased tariff in the US will make the domestic industries more competitive. This will kickstart a rejuvenation of the US economy, making it the world’s production hub. The US economy will attract massive investment, creating more jobs. 

Will US become world’s manufacturing hub?

Really? As the US is a consumer economy, consuming more than it can produce, and it is expected to remain so shortly, the trade deficit will continue to dominate the US economy. 

Secondly, as the labour cost is very high compared to other economies like China, the US will never be able to reduce its input cost. Thirdly, the entire capitalistic structure of the economy does not allow the state to provide subsidies like those in India or cheap electricity like China. 

Some other countries also enjoy the advantage of cheap raw materials, unlike the US. These factors make the US economy uncompetitive from a production point of view and prohibit it from becoming a production hub, unlike China. 

Who will pay for increased tariffs?

The increased tariffs will be paid by the US consumers, increasing the cost of the products and the money will go to the US exchequer. It will increase the inflation rate, the US citizens will have to pay more, and their living standards will come down. 

A decreased purchasing power, due to increased inflation and less disposable income, will put pressure on the US economy, making it further uncompetitive. 

The US will lose its shine as an investment destination; business houses may opt to disinvest and move to greener pastures like China, India, Vietnam, or Latin American countries like Brazil. This will start a recession in the country. 

Is recession looming large on US?

However, the US economy may suffer the most. Experts believe the real disposable income could shrink during 2025’s second and third quarters, it may cause real consumer spending to simultaneously shrink. On the other hand, personal consumption expenditures would go up by an additional 1% to 1.5% this year.

The Personal Consumption Expenditure (PCE) inflation may soar to 4%, its highest level since spring 2023.  

An increasing number of economists have warned that the US could slip into a recession largely because of increased tariffs. Prior to the announcement of the reciprocal tariff rates, based on a forecasted 15% tariff rate, Goldman Sachs upped its odds of a recession over the next year to 35%. 

Talking to Forbes, JP Morgan’s chief economist, Michael Feroli, said that Donald Trump’s new policies will “take the economy perilously close to slipping into recession”. 

He shared many alarming forecasts of economic data based on the fresh tariffs. Feroli also said that Trump’s speech was at the “very hawkish end of the range of expected outcomes” from his heavily teased tariff announcement. 

Reciprocal Tariff: Impact on China

The US recession is sure to impact the world economy, which may be pushed further down. China, the biggest source of goods in the US, may suffer the most, considering the fact that it exported products worth $400 billion to the US. 

Experts believe the Chinese GDP, estimated at $17.79 trillion, recorded a growth rate of 5.2% in 2023. It registered a growth rate of 5% with an estimated GDP of $18.80 trillion in 2024. 

Experts believe that China may suffer a slowdown of 50 basis points in the GDP, which may result in a loss of $940 billion. 

How will India be impacted?

India is estimated to suffer a loss of 60 basis points in its GDP. India’s GDP is estimated to be about Rs 184.88 lakh crore or $2.164 trillion in the real term. Coming under the impact of the reciprocal tariff regime, its GDP may come down by $12.98 billion.

Reciprocal Tariff: Impact on EU

The exports from the European Union represented 15% of global exports while its import represented 14%. After the US imposed a tariff of 20% of the 27-member bloc, it is apprehended that its GDP may fall. 

The GDP of the EU member states reached EUR 17.935 trillion or $19.908 trillion in 2024. It was expected to touch EUR 18.30 trillion or $20.29 trillion in 2025. 

With a 20% tariff on its exports, it is most likely to fall by an estimated 30 basis points. The total GDP of the EU member nations may come down by $60.87 billion.