Can Donald Trump's Tariffs Push World Into Recession? 'Yes' Says IDFC Economist

(By: Gaura Sen Gupta, Chief Economist, IDFC Bank)

The reciprocal tariffs turned out to be much more than reciprocal. The actual tariff increases were significantly higher than what would have been implied by tariff differentials. For instance, for India the tariff differential versus the US is 9% as per WTO data. Reciprocal tariff increase was significantly higher at 27%. Similar was the case for other countries. It appears that the tariff calculation was extremely simplistic and linked to the trade deficit that the US has with that country. So instead of creating a level playing field by equalizing the tariffs imposed by other countries, the US government is penalizing trading partners for outperformance in exports.

The weighted average tariffs imposed by the US have risen from 2.4% in 2024 to 22.4% in 2025. This includes reciprocal tariffs and other tariffs announced in 2025. This will definitely have a disruptive impact on global trade and growth, with the US accounting for 13% of world imports and being the largest trading partner for many countries. The impact of the tariffs on US growth is estimated to be 0.9ppts by the end of 2025 (The Budget Lab Yale). As per FOMC projection US GDP growth is estimated at 1.7% in 2025. The tariff impact implies growth will be only 0.8% in 2025. Many are speculating the US could go into recession due to the tariffs. This is because of the second-round impact due to global growth slowdown and decline in stock markets. The latter will result in a negative wealth effect, which in turn could dampen consumption expenditure. At the same time tariffs are likely to drive inflation in the US higher. The cumulative impact of all the tariffs in 2025 could add 1.9% to core PCE inflation. Such a high impact on inflation will limit the ability of the Fed to cut policy rates despite growth in the US weakening.

 

The impact on export driven economies is expected to be even more as the US accounts for a significant share in their exports. Vietnam, which has likely reached an agreement with the US, would have faced a 3 ppt decline in GDP growth if the tariffs would have been applied. The cumulative impact of the tariffs applied on China in 2025 is estimated at -1.1ppts.  Mexico and Canada which were not part of the reciprocal tariffs as the US had already applied additional tariffs of 25%, could see a negative impact of 3ppts or more.

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Against this chaotic background of tariff uncertainty, India remains relatively less impacted as it’s a domestic demand driven economy just like the US. We estimate impact at -0.5ppts on GDP, which could be higher if second round impacts via global growth weakness are incorporated. The US is India’s largest trading partner and accounts for 18% share in India’s total exports. But growth impact is limited as India exports to the US account for 2% of GDP. Given the rise of global value chains, a better metric would be domestic value-added content in India’s exports to the US. On this metric, it’s a bit higher at 4% of GDP. The US is a key market for Indian exports of pharmaceuticals, electrical machinery, pearls and precious metals and apparel clothing. In these segments the US accounts for 30% to 40% market share. Hence the impact of tariffs is likely to be felt in these segments.

India is also working on a bilateral agreement with the US, which could consist of sharp reduction in tariffs on majority imports and possibly higher imports from the US. The latter could consist of higher crude oil imports from the US and possibly defense imports. Currently US exports to India account for just 2% of US total exports.  In case an agreement is reached it will reduce the negative impact on growth.

This volatile background has increased the chances of a deeper rate cutting cycle in US and India, however few unknowns remain. Mainly the Fed reaction function to a stagflationary environment. The high inflationary impact of the tariffs in the US will limit the Fed’s ability to cut rates even though growth in the US weakens significantly. Hence the Fed will take its time before committing to a policy path and this is exactly what was communicated by the Fed Chair.