Since Donald Trump resumed the US presidency in January 2025, his tariff policies have become the most economic measure of his second term. Despite the 2024 elections not focusing on tariffs, the imposition of higher tariffs has sparked intense debate. This policy involves taxing imported goods, raising prices for domestic consumers without boosting productivity. The following sections explore the effects of these tariffs on various aspects of the US economy.
About Reciprocal Tariffs
Reciprocal tariffs are taxes imposed by the US on imports from countries that levy tariffs on American goods. These differ from World Trade Organization (WTO) regulated tariffs, which are usually negotiated multilaterally. Since January 2025, the effective US tariff rate has increased from about 2.5% to an estimated 9.1% based on actual imports, though announced rates suggest up to 18.6%. The difference arises because not all tariffs announced are fully applied, and importers may absorb some costs to retain customers.
Effect on Stock Markets
Stock market performance offers mixed signals about the economy’s health under increased tariffs. The NASDAQ 100, dominated by top technology firms, rose by over 10% in 2025. However, broader indices like the S&P 500 and Dow Jones showed slower growth. The Dow Jones Transportation Average even declined. Small-cap stocks barely grew. This disparity suggests that while tech firms thrive, many other sectors face challenges, reflecting uneven economic impact.
Inflation and Consumer Prices
Tariffs directly increase import costs, pushing consumer prices higher. Domestic producers often raise prices in response, affecting related goods as well. Since April 2025, inflation measured by Personal Consumption Expenditures (PCE) has edged above the Federal Reserve’s 2% target, nearing 3% by mid-year. Wholesale inflation also surged to 3.3% in July, the highest since early 2025. Rising inflation pressures the Fed to maintain or raise interest rates, which can slow economic growth.
Monetary Policy Challenges
The Federal Reserve initially planned to cut interest rates multiple times in 2025 to stimulate growth. However, higher inflation linked to tariffs has prevented these cuts. The Fed’s recent minutes reveal concerns over tariff-driven inflation and its delayed but growing impact on prices. This situation complicates monetary policy, as the Fed must balance controlling inflation without stifling growth.
Slowing GDP Growth
The US economy’s growth momentum is waning. After solid growth rates of nearly 3% in 2023 and 2024, GDP growth is projected to slow to 1.9% in 2025 and 1.2% in 2026. The combination of rising inflation and slowing growth risks stagflation, where economic stagnation coexists with persistent inflation, a challenging scenario for policymakers.
Employment Trends
Post-pandemic recovery created a tight labour market with more vacancies than unemployed workers. However, recent data shows a slowdown in job creation and a slight rise in unemployment. These trends align with the broader economic slowdown and inflation pressures, suggesting tariffs may be contributing to weaker labour market conditions.
US Dollar and Global Trade
The US dollar remains the dominant global currency, used in most foreign exchange transactions and international trade. However, tariffs and related economic uncertainties have weakened the dollar against major currencies like the euro, yen, pound, and Canadian dollar. A weaker dollar reduces American purchasing power, making imports costlier and complicating trade dynamics.
Overall Economic Impact
Trump’s tariff policy has increased government revenue but at a cost to the broader economy. Rising consumer prices, inflation, slower GDP growth, weaker employment, and a depreciating dollar point to mounting economic strain. The gradual pass-through of tariff costs to consumers is reducing demand and economic vitality across sectors beyond technology.
Questions for UPSC:
- Taking example of the US tariff policy in 2025, discuss the impact of protectionist trade measures on global economic stability and growth.
- Examine the role of the Federal Reserve in managing inflation and growth during periods of external economic shocks such as tariff impositions.
- Analyse the relationship between currency strength and international trade, with reference to the US dollar’s fluctuations in 2025.
- Critically discuss how inflation and unemployment trends can coexist during stagflation, citing examples from recent economic scenarios worldwide.
