Goldman Sachs: Global Trade and Tariff's Q&A
Tariff Developments: U.S., Canada, Mexico, and China
President Trump signed orders imposing new tariffs on Canada, Mexico, and China.
Canada & Mexico tariffs delayed until March 4 – further extension likely, but risk remains through the USMCA review in mid-2026.
10% tariffs on Chinese imports took effect February 4 – Goldman expects further escalation, reaching a total increase of ~20%.
Bottom Line: While the new tariffs are significant, they are not yet at levels required to fundamentally alter global trade flows in line with Trump’s goals.
Goldman’s Revised Tariff Outlook
Goldman now assumes tariffs on critical imports, covering approximately $600B in trade, including:
Oil & gas
Industrial metals
Pharmaceuticals
Semiconductors & electronics
Critical minerals
Additional Risks (Not in Baseline but Possible)
Global auto tariffs
Broad tariff on the EU
Universal import tariff
Economic Impact of Tariffs
Goldman’s new tariff projections raise the effective tariff rate by 4.7% (previously 3.0%).
If Canada & Mexico tariffs are implemented, the rate rises by another 5.8%.
Applying Goldman’s inflation rule of thumb (1% tariff hike → +0.1% to core PCE inflation), tariffs are projected to:
Raise core PCE inflation by 0.5% (vs. 0.3% previously)
Push core PCE inflation to 2.6% by December
Peak inflation above 3% if Canada & Mexico tariffs take effect
Goldman’s Take: Inflationary impact is notable but far from "hyperinflation" concerns raised by some policymakers.
Impact on GDP, Financial Conditions & The Fed
GDP Growth Outlook
No change to 2025 GDP growth forecast: 2.4% Q4/Q4.
Despite larger tariffs, financial conditions have not tightened as much as in 2018-2019, limiting downside growth risks.
Federal Reserve Policy Response
Goldman maintains its Fed forecast:
Two rate cuts in 2025 (June & December)
One more cut in 2026 → Terminal rate: 3.5%-3.75%
Tariffs make Fed rate cuts an even closer call, but Goldman still expects easing this year.
Bottom Line: Tariffs add to inflationary risks but do not yet alter the Fed’s expected rate path.
Q&A
Q: What just happened?
A: After signing orders on February 1 to impose tariffs on imports from Canada, Mexico, and China starting February 4, President Trump pushed back the tariffs on Canada and Mexico by 30 days, as leaders of both countries committed to send 10,000 troops to their respective borders with the US and increase cooperation on organized crime, fentanyl, and other issues.
So far, the outcome of trade policy in the second Trump administration is similar to our expectations, with a quick increase in tariffs on imports from China but a postponement of tariffs on Canada and Mexico. That said, the outlook feels more uncertain and, even with the delay, we think the risks have tilted toward higher tariffs than we had previously assumed. The challenge is that creating uncertainty is likely part of President Trump’s strategy.
Q: Will US tariffs on Canada and Mexico eventually rise?
A: We think the current US tariff levels on imports from Canada and Mexico are likely to generally hold—as noted below, tariffs look more likely to rise on certain products—but the tariff threat is likely to remain on the table until at least the USMCA review is complete in mid-2026, and possibly beyond. The February 3 executive orders suspending the tariff until March 4 state that if the border situation worsens or the countries fail to take sufficient action, the tariffs might be implemented.
We assume that the tariffs will not take effect during the 30-day pause, but the March 4 deadline is likely to be a source of renewed uncertainty. For now, we think it is more likely to give way to yet another deadline further in the future, with continued uncertainty. There is a clear risk that President Trump ultimately follows through with the Canada and Mexico tariffs, particularly with regard to Canada where the upcoming election and political transition make a longer-term resolution less certain than it might be with Mexico. But we think it is more likely that tariffs on Canada and Mexico remain a source of leverage the administration holds in reserve.
Q: What about the China-focused tariffs?
A: While the tariffs on Canada and Mexico have been paused, the 10% additional tariff on imports from China has taken effect, and we expect that these tariffs will remain in effect for the foreseeable future. Our base case is that tariffs on imports from China increase further, though President Trump’s comments since inauguration have put much less emphasis on China than during the campaign. Nevertheless, we expect China-focused tariffs to rise by roughly another 10pp on top of the recently announced tariffs, via higher tariffs on primarily non-consumer products. An even higher tariff rate is a clear possibility—Trump recently mentioned the 60% tariff he proposed during the campaign—but we don’t view this as the base case. While a “Phase Two” deal with China at some point cannot be entirely ruled out, the experience of the first Trump administration suggests that even if a deal is reached, most tariffs would remain in place. At this point, it is also unclear what exactly such a deal would involve.
Q: What are the next potential targets for US tariffs?
A: Certain products, and certain trading partners, appear to be at greatest risk of near-term tariff threats. We already believed the odds of a tariff on ‘critical imports’ had risen, but we now view this as the base case. President Trump recently mentioned semiconductors and other electronic components, pharmaceuticals, industrial metals, and oil/gas as potential targets for tariffs, some of which he said could be announced as soon as February 18. We expect such a tariff might also target other categories that have been discussed more broadly as potential supply chain vulnerabilities, such as “critical minerals” (e.g., rare-earth minerals), power technology (e.g., batteries) and health-related supplies. Overall, we think this would amount to around $600bn in goods.
Some of the products in question are politically counterintuitive. There are few prices that US politicians face more pressure to lower than those of gasoline and pharmaceuticals. However, President Trump has prioritized increasing domestic energy production and might believe tariffs could be combined with regulatory easing to stimulate greater domestic production without a price increase. Similarly, it is possible that Trump might expect that tariffs on pharmaceuticals could be offset with lower negotiated prices (Medicare price negotiations enacted during the Biden administration cover only a limited number of drugs each year and do not apply to the private sector).
A global auto tariff is also a clear risk, though not our base case. President Trump focused on protecting the auto sector during the presidential campaign and he has continued to mention auto imports since coming into office. The auto sector was central to the USMCA negotiations during Trump’s first term and is likely to be one of the main sticking points, along with how to treat imports of Mexican-made products from Chinese-owned factories, over the next 18 months. With regard to USMCA, the challenge is that rules on North American content are so strict that manufacturers simply pay the 2.5% general tariff on some auto imports instead of complying. Further restrictions could push a greater share of imports to pay the general tariff, and the most obvious solution would be to raise the general tariff on auto imports. Beyond a tariff on critical imports, the auto sector appears to be at greatest risk in the US trade relationship with Canada and Mexico.
Auto imports from the EU are at still greater risk, we believe, and our base case continues to include a tariff on EU-produced vehicles, which he proposed during his first term but never implemented. President Trump has highlighted the low level of EU auto imports from the US multiple times recently and said on February 2 that EU-focused tariffs would “definitely happen.” The US imports around $60bn/yr in autos and parts from the EU.
While it is not our base case, there is a fair chance that EU-focused tariffs could apply more broadly than autos or critical imports and cover essentially all imports. Regardless of the exact scope of the tariff, some kind of EU-focused tariff appears to be a growing risk, given Trump’s focus on EU policies including auto tariffs, value-added taxes, NATO military spending and Ukraine support, and the potential for a major dispute over EU taxation of US companies (particularly US tech companies).
Q: What about the universal tariff?
A: Since the presidential election, we have viewed a universal tariff on all products from all countries as a clear risk but not quite the base case. Following inauguration this had started to look like a slightly lower risk, for two reasons. First, President Trump seemed focused much more on bilateral negotiations and country-specific tariffs (e.g., Canada, Mexico, China, and the EU). Second, as noted earlier, Trump has recently discussed tariffs on specific products, which isn’t obviously compatible with a global tariff on all products even if one does not necessarily rule out the other.
More generally, we think the factors motivating a global tariff might not be as strong as the motivations behind some of Trump’s other tariff ideas. Some tariffs, like those proposed on Canada and Mexico, seem intended mainly as leverage in negotiations to extract concessions. Others, like a tariff on critical imports, seem intended to increase domestic production of particular products of importance to the US for economic or security reasons. While in theory a global tariff could also address these concerns, it is not best suited for either.
A global tariff would be best suited for revenue generation, as it would apply a lower rate—likely 10%—to a broad base of imports. While President Trump has highlighted the revenue gains from tariffs, the administration’s proposed and implemented actions so far suggest this is a less important consideration than bilateral negotiation or protecting domestic industries.
Q: Will fiscal considerations drive tariff increases?
A: While fiscal motivations do not seem to have driven tariff proposals so far, they could become more important over the next few months. Congressional Republicans seek budgetary savings to offset the cost of extending the 2017 tax cuts and new tax cuts President Trump proposed during the campaign. While many Republican lawmakers support extending the existing tax cuts without offsetting savings, a few are pushing for spending cuts to offset the cost. At this point it looks unlikely Congress will agree on spending cuts worth more than a fraction of the roughly $5 trillion/10 year cost of these tax cuts. In theory, this could lead Republicans to support tariffs to fund tax cuts. And claims that other countries pay the cost of US tariffs—Trump has proposed an “External Revenue Service” to make this point—might make tariffs more politically palatable than cuts to benefit programs.
But the practical relationship between tariffs and the fiscal policy decisions in Congress appears loose for now. Congressional Republicans look very unlikely to include broad tariffs in their fiscal package, as it would reduce support among many farm-state Republicans even if it increases support among those with deficit concerns. Fiscal decisions in Congress also need to be made in the near-term, before additional tariffs look likely to be implemented. Republican leaders aim to agree on budgetary targets for the upcoming fiscal package in the next few weeks (they had aimed for the week of February 3 but this has been delayed). Republican leaders are likely to cite expected tariff revenues as justification for the cost of the fiscal package, but more tariff revenue seems unlikely to mean a larger tax cut this year than would otherwise occur.
Q: What is your baseline view now on tariffs?
A: We have added a 10% tariff on critical imports to our baseline, on imports of around $600bn per year. We continue to expect another round of China-focused tariffs that increases the average tariff rate on imports from China by roughly another 10pp, concentrated on non-consumer products. We also continue to expect a tariff on autos from the EU. The base case assumptions that we include in our economic forecast are bolded in the table in Exhibit 1.
Q: Are other countries likely to retaliate against US exports if the US does impose tariffs?
A: Yes, US tariffs are likely to be met with foreign retaliatory tariffs. China filed proceedings with the WTO and announced a combination of retaliation measures, including increasing tariff rates by 10-15pp on $14bn of imports from the US, imposing export controls on critical minerals, and putting non-tariff barriers on US companies operating in China. Canada also published lists of retaliatory tariffs that would have targeted food, autos, steel and aluminum, and some goods produced in Republican-leaning areas, if US tariffs had been implemented. If the US imposes the additional tariffs in our baseline, other countries would likely retaliate with their own tariffs against US exports, as occurred during President Trump’s first term and is typical in trade conflicts.
Q: How much would the tariffs that you now expect raise the effective tariff rate?
A: We estimate that the tariffs in our new baseline would raise the effective tariff rate by 4.7pp, more than our previous expectation of a roughly 3pp increase and more than the 1.5pp increase during the first Trump administration. Of this, 2.6pp comes from tariffs on imports from China, 1.7pp from tariffs on critical imports, and 0.4pp from tariffs on EU autos.
The additional tariffs that we do not include in our baseline but see as significant risks would raise the effective tariff rate further. For example, if the postponed tariffs on Mexico and Canada are eventually implemented, we estimate they would raise the effective tariff rate by an additional 5.8pp.
These would be large increases compared to past US policy. During President Trump’s first term, we noted that even the Smoot-Hawley Act of 1930 likely only raised the effective tariff rate by about 2pp, with the rest of the roughly 6pp increase in the 1930s occurring unintentionally because tariffs were set as dollars per unit at the time and the deflationary environment caused the percentage to rise.
Q: How do your new tariff expectations affect your inflation forecast?
A: Our rough rule of thumb is that every 1pp increase in the effective tariff rate raises the core PCE price level by 0.1% through the channels shown in Exhibit 4. This implies that our baseline 4.7pp increase in the effective tariff rate will eventually raise the core PCE price level by 0.47%. Because the tariffs are likely to be implemented within a few months of each other, this would imply a roughly 0.47pp peak one-time boost to 12-month inflation, a couple tenths more than the boost we estimated from our previous tariff assumptions.
We can apply this rule of thumb with a bit more precision now that we have some sense of the timing and composition of possible tariff packages. We first break each tariff package into core consumer goods, food and energy (which affect headline inflation), core intermediate goods, and core capital goods, as shown in Exhibit 5. We assume that the passthrough from higher core consumer and food and energy import prices to consumer prices occurs over three months because our analysis of the first trade war showed that this tended to happen quite quickly, and we assume that the passthrough from intermediate inputs and capital goods to consumer prices occurs over twelve months.
We then use our assumptions about when each tariff will take effect to phase in the passthrough from higher import prices to higher consumer prices for each type of import in each tariff package. We assume that all of the tariffs in our baseline would stay in place indefinitely over the forecast horizon.
Exhibit 6 shows that in the absence of tariffs, we would expect core PCE inflation to fall to 2.1% by December 2025. With the tariffs in our new baseline, we instead expect it to remain steady this year and reach 2.6% in December (vs. 2.4% previously). A risk scenario where the White House imposes and maintains tariffs on imports from Canada and Mexico produces the highest inflation path, peaking at just over 3%. A risk scenario with a 10% universal tariff produces the second highest inflation path, and a scenario with a 60% tariff on all imports from China ranks third.
Q: Are you making any changes to your GDP growth forecast?
A: No, we are leaving our 2025 GDP growth forecast unchanged at 2.4% on a Q4/Q4 basis. Although the tariffs in our new baseline are larger than those we previously expected, the impact on financial conditions has so far been much smaller than in 2018-2019, even though online prediction markets suggested that most people had expected tariffs on Canada and Mexico to be implemented this week. We previously showed that US equity prices fell by over 10% in windows around tariff announcements in 2018-2019, even though those tariffs only raised the effective tariff rate by 1.5pp. The Canada and Mexico tariffs alone would have had at least quadruple that effect on the effective tariff rate, but the equity market was down just 2% even at the moment when implementation looked most likely. As a result, we have revised down our estimate of the GDP hit via financial conditions, though it remains highly uncertain.
Our new estimate of the hit to GDP growth in Exhibit 7 is similar to our previous estimate. As we outlined in our 2025 Outlook, the net effect of tariffs and other policy changes we expect under the new administration would be a small drag on growth in 2025 and a small boost to growth in 2026, with a roughly neutral net effect after a couple of years.
Q: Have you made any changes to your Fed forecast?
A: We have not made any changes to our forecast of two rates cuts this year in June and December and one more in 2026 to a terminal rate of 3.5-3.75%. We had already seen the question of whether the Fed would be willing to cut this year amidst a moderate inflation boost from tariffs as a close call. If all of the tariffs in our revised baseline are eventually implemented and as a result year-over-year core PCE inflation runs closer to 2.6% than our previous forecast of 2.4%, it would become an even closer call.
Q: What happens next?
A: President Trump has mentioned February 18 as a possible date for the imposition of oil and gas tariffs, and Canada and Mexico tariffs are technically set to take effect, after a delay, on March 4. Beyond those potential deadlines, the March-April period is also likely to see a number of reports and recommendations on trade policy from the Trump administration.
The recent presidential memo on trade instructs the US Trade Representative to make recommendations by April 1 on China’s adherence to the Phase One trade deal and unfair trade practices, and to recommend tariffs and other responses as necessary. It also calls on trade-related agencies (primarily Commerce, Treasury, and USTR) to make recommendations to deal with the trade deficit in general, potentially through a “global supplemental tariff”, unfair trade practices of specific countries, currency policies, reevaluation of free trade agreements including but not limited to USMCA, unfair foreign taxation of US businesses, China’s compliance with the Phase One trade agreement, an updated investigation on China’s economic policies and circumvention of previously imposed tariffs, outbound investment restrictions, and export controls. While there is no guarantee that all of these recommendations will be completed on time, trade policy uncertainty seems likely to rise further following the April 1 deadline.