Tariffs and global growth
What happens next?
What will be the growth impact across the world of Liberation Day tariffs?
This is difficult given the magnitude of announced tariffs, the largest imposed on trading partners in the past 50 years. And it is complicated by the uniquely high policy uncertainty and growing disregard for rule of law — before we begin to consider trading partner responses.
Still, it is possible to get a sense of those likely most impacted.
Effective tariffs across trading partner
The chart below shows the effective tariffs now imposed by trading partner. Summing those announcements pre-Liberation Day with the reciprocal tariffs announced this week, we get a range of bilateral tariff rates—from close to 10% at the bottom to nearly 60% in China. The median tariff is about 20% (applied to the European Union.) The overall effective tariff rate we put at 26.9%.
What about growth?
A back of the envelope estimate of the growth impact of year-to-date US tariffs can be calculated as follows:
[Effective incremental tariff rate] * [Partner country value added embodied in final US domestic demand as percentage of partner GDP] * [US imports elasticity to tariffs].
By combining export exposure to US final demand with the import elasticity and effective tariff rate, we get a quick read on the growth impact. Obviously, if there is zero elasticity, then growth will not be impacted — US consumers would be running down buffers, or up their credit cards to see off the tariff impact. But this seems unlikely, not least as balance sheets are not as strong as during the pandemic inflation episode.
Obviously, we abstract away from any pricing power, exchange rate and general equilibrium effects and any growth supportive policy responses or retaliation by the trading partner.
A value added framework is more robust than focusing on export exposure alone, given presence of global value chains.
What’s the result? The ordinal ranking of countries in our framework is function of valued added exposure to US final demand and the effective tariff rate. By this metric, domestic growth in Vietnam, Thailand, Taiwan, Switzerland, South Korea, China, Malaysia, Japan, India and Israel are most at risk due to incremental US tariffs. Argentina is least at risk.
The key variable affecting partner growth impact is the import elasticity in the US. Economic literature suggests a range of elasticities between -0.5 to -2. We present results here assuming import elasticity of tariffs between -0.5 to -1. Higher the import elasticity, higher the growth hit to the trading partner. (link, link, link)
In Vietnam’s case, the growth impact of a 46% effective tariff rate ranges between 1.7 to 3.4% when we vary import elasticity between -0.5 and -1. For China the growth hit varies between 0.6 and 1.3%. For the EU the impact range is 0.3-0.5% is close to the numbers reported in the press and attributed to Lagarde.
Obviously, import elasticities will vary product-type, so there will be variation across trading partners given their composition of imports to the US. But this provides a rough-and-ready way of thinking about the growth impact.
What does this mean for global growth? A simple GDP-weighted average of major US trading partners implies a global growth hit of 0.4%-0.8% of Global GDP excluding the US due to incremental tariffs this year.
Put another way, global growth hinges on US household’s willingness to run up their credit cards—that is, until they get a pay rise to compensate for rising inflation.
The content in this piece is partly based on proprietary analysis that Exante Data does for institutional clients as part of its full macro strategy and flow analytics services. The content offered here differs significantly from Exante Data’s full service and is less technical as it aims to provide a more medium-term policy relevant perspective. The opinions and analytics expressed in this piece are those of the author alone and may not be those of Exante Data Inc. or Exante Advisors LLC. The content of this piece and the opinions expressed herein are independent of any work Exante Data Inc. or Exante Advisors LLC does and communicates to its clients.
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