Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
The United States’ current tariff regime, which has seen duties rise to levels not observed since the 1930s, is projected to result in reduced US economic output, higher domestic prices, and lower American wages over the coming decade. This assessment comes from a new analysis published on October 1, 2025, by Warwick J. McKibbin, Marcus Noland, and Geoffrey Shuetrim, which updates their earlier work on President Donald Trump’s 2025 tariffs by focusing on duties in effect as of September 11, 2025.
Economic Projections
GDP and Inflation Impacts
The analysis forecasts a significant slowdown in US GDP growth, projecting a reduction of 0.23 percentage points from baseline in 2025 and 0.62 percentage points in 2026. Concurrently, inflation, as measured by the consumer price index, is expected to rise by 1 percentage point above baseline for the year following September 11, 2025. While the Federal Reserve’s actions are anticipated to bring inflation rates back towards baseline over time, the US price level is expected to remain permanently elevated compared to a scenario without the tariffs.
These economic shifts are attributed to several factors: the increased prices of imported goods, which raise costs for consumers and businesses; a subsequent decline in the incomes of US households and firms; and a reduction in foreign demand for US exports.
Employment Shifts
The report indicates that US employment, measured in hours worked, would decline most significantly in sectors highly exposed to trade. Durable goods manufacturing, mining, and agriculture are identified as the hardest-hit sectors, experiencing the largest drops in employment. The decrease in manufacturing employment also reflects a broader slowdown in investment across the US economy due to the tariff increases. While total employment is assumed to eventually return to baseline levels, the authors project a permanent structural shift from these trade-exposed sectors towards the service sector, accompanied by lower real wages for all workers.
Broader Context and Policy Implications
Recessionary Risks
The authors clarify that the current tariffs alone are not projected to cause a US recession. However, they reference their September 2024 paper, “The international economic implications of a second Trump presidency,” which suggested that a US economic contraction could occur if the tariffs were combined with other major shocks, such as mass deportations of unauthorized immigrant workers and a loss of political independence for the US Federal Reserve. These additional factors, they note, would represent much larger shocks to the US economy.
Modeling Framework and Trade Balance
The analysis utilized the G-Cubed global economic model to generate baseline projections and then measure the tariffs’ effects as deviations from that baseline. The authors contend that the use of tariffs as a foreign policy tool and as an attempt to reduce the US trade deficit is misguided. Their modeling framework suggests that the trade balance responds more significantly to shifts in national savings and investment than to changes in tariffs.
Furthermore, the authors highlight that the larger federal budget deficit projected from legislation enacted in July is likely to reduce US national savings. This deficit would then be financed by capital inflows from foreign sources, which, in turn, is expected to worsen the US trade deficit.
Key Takeaways
The updated findings reinforce earlier projections, indicating that the sustained high tariff environment initiated by the United States since February 2025 carries substantial negative economic consequences domestically. The precise impacts on specific economies and sectors globally vary, reflecting differences in applied tariff rates and their relative effects across countries and industries.
