Modelling the Economic Impact of U.S. Tariffs Announced in March-April 2025: Assessing Outcomes With and Without the U.S. "Reciprocal" Tariff Package

This paper examines the economic impacts of U.S. tariff increases announced over March-April 2025 using GTAP-FIN, a dynamic global general equilibrium model. We simulate six scenarios, comprised of the product of three retaliation and fiscal cases (i. U.S. tariff increases without retaliation; ii. retaliation by all trading partners except Australia, Japan, and South Korea; and, iii. retaliation coupled with U.S. fiscal consolidation via tariff revenue) and two U.S. tariff policy cases (i. without the U.S.' "reciprocal" tariff package, and, ii. with the "reciprocal" package). Economic impacts are larger in the three scenarios that include the U.S.' "reciprocal" tariff package. Across all scenarios, U.S. real GDP falls, driven by deep short-run employment losses, long-run capital stock contractions, and persistent allocative efficiency losses. In the no retaliation scenarios, improved U.S. terms of trade buoy U.S. real consumption outcomes relative to the contractions in real GDP. However, this benefit is reversed under retaliation, which lowers U.S. export prices and consumption. Fiscal consolidation amplifies U.S. consumption losses but mitigates investment declines. Australia is modestly affected, benefiting from improved terms of trade and investment in the retaliation scenarios. For China (PRC), heavy tariff exposure results in sustained terms of trade and consumption losses, although outcomes improve marginally with U.S. fiscal consolidation. Globally, regions most exposed to U.S. tariffs see the sharpest consumption declines, particularly under the no retaliation scenario. The analysis does not capture the heightened investor uncertainty arising from the unclear policy rationale behind the tariffs, suggesting that adverse economic impacts may exceed those estimated in this paper.