5-MINUTE READ May 21, 2025
PERSPECTIVE
Navigating the new tariff landscape and its economic impact
The landscape to date
On April 2, President Trump unveiled the largest and most sweeping tariff package to date in his second term. This consisted of an additional 10% tariff on imported goods from all countries, which entered into effect on April 5, and higher, individualized “reciprocal” tariffs of up to 50% on imports from 57 countries including China, Japan and EU nations. The latter initially came into effect on April 9, but have since been paused for 90 days for all countries except China, which instead saw its reciprocal tariff increase to 125%. The 10% universal tariff remains in place.
The current reciprocal tariffs–and the 90-day pause–do not apply to Canada and Mexico, as these countries face a separate 25% tariff on goods that do not comply with the United States-Mexico-Canada Agreement (USMCA), nor to foreign-made autos, steel and aluminum, which are also subject to a separate 25% tariff.
With these developments, the average trade-weighted, or effective, tariff rate on goods imports into the U.S. has risen to roughly 29%—the highest level since the early 1900s and up from only 2.4% at the end of 2024.
As noteworthy as the magnitude of the tariffs, however, is the unprecedented uncertainty introduced by their scale and ever-changing nature. The only certainty is that executives should focus on creating more resilient organizations to navigate this historically volatile environment.
The economic impact of tariffs
The economic impact of the new U.S. tariff regime is likely to be substantial. In the U.S., risks of a recession have risen considerably. And how will the new U.S. tariff regime affect the global economy? As shown below, Asia is particularly exposed to higher tariffs, with the EU also facing a significant increase.
Another factor that will determine the global impact is the extent to which other countries retaliate by increasing their own tariffs. To date, only Canada and China have implemented retaliatory tariffs against the U.S. The EU signaled an intent to impose new tariffs but put them on hold in response to President Trump’s 90-day pause.
Decisions to retaliate will be influenced by the perceived costs and benefits. The figure below illustrates three significant variables that may affect countries’ responses:
- the effective tariff rate increase they face under the new U.S. tariff regime;
- the share of goods exported to the U.S. as a percentage of their GDP; and
- the country’s relative importance as a destination for U.S. exports
The interaction of these variables could give rise to at least three broad future tariff scenarios. Given the high level of uncertainty at play and the frequent shifts in U.S. trade policies in recent weeks, these should be viewed as illustrative signposts along a continuum of possible outcomes.
First Scenario: Pragmatic de-escalation
In the first scenario, “pragmatic de-escalation”, reciprocal tariff reductions are negotiated for most countries, as well as possible exemptions from some of the product-specific tariffs.
The first step of this process is already playing out with the April 9 pause of the higher reciprocal tariffs. In this scenario, the Administration may choose to maintain the minimum 10% universal tariff for two key reasons: (1) to preserve some support for the Administration’s re-industrialization and fiscal revenue objectives; and (2) to limit the scope for tariff evasion via transshipment and other methods, something the Administration has consistently voiced as a concern. This scenario outcome, our analysis shows, could bring the U.S.’ effective tariff rate back down to a range of 15-17% (compared to the estimated 29% at present).
Third Scenario: Disorderly escalation
In the third scenario, “disorderly escalation”, failed negotiations and/or significant retaliation by other countries would cause tariff rates to spiral higher, and the trade war could broaden to include restrictions on cross-border services, technology and investment.
This outcome could push the U.S.’ effective tariff rate north of 40% and also result in considerable and widespread increases in the tariff rates other countries charge on the U.S.
Staying ahead of the curve
The interaction of these variables could give rise to at least three broad future tariff scenarios. Given the high level of uncertainty at play and the frequent shifts in U.S. trade policies in recent weeks, these should be viewed as illustrative signposts along a continuum of possible outcomes.
Staying ahead of the curve
The time for companies to innovate and adapt to the evolving landscape is now. Autonomous systems not only promise value creation but also prepare organizations for future technological advancements, including artificial general intelligence (AGI) and quantum computing. By focusing on critical outcomes and fostering human + machine collaboration, businesses can unlock new levels of efficiency and resiliency throughout their end-to-end supply chains.