Tariffs and Reciprocal Tariffs – Feb. 18, 2025
President Trump’s announcement last week that agencies should plan to meet reciprocal tariffs raised the specter of a global trade war on the one hand and signaled a reprieve from the immediate impact on the other. Any decision on whether to impose new tariffs may not happen until April 2, pending the results of an investigation Trump has ordered.
The effects of large-scale enactment of tariffs can’t be underestimated, Fitch Ratings said in its newly issued Credit Brief for the first quarter of 2025. “Trade protectionism is potentially the most impactful initiative thus far for the U.S. economy,” according to Fitch. “The willingness to erect significant tariff barriers has raised uncertainty about broader tariff policy.”
A dramatic increase in U.S. import tariffs would raise consumer prices and input costs, “posing significant downside risk to consumer spending growth,” Fitch said in the Credit Brief. The rating agency sees consumer momentum decelerating as 2025 progresses, due partly to an increase in tariffs but also due to the effects of slower investment and government spending growth.
“Fitch estimates the U.S. weighted average effective tariff rate would jump to 13.3% from 2.3% in 2023 if the U.S. imposes tariffs of 25% on all goods from Mexico, 25% on all non-energy goods and 10% on energy imports from Canada and raises tariffs to 10% for other countries and higher than the 10% currently in place for China, in line with the assumptions in our most recent Global Economic Outlook.
“Model-based analysis suggests this tariff shock would lead to a total reduction of about 0.8% in U.S. GDP,” according to the brief. “However, this scenario does not incorporate retaliatory tariffs, which could compound growth and inflationary effects.”
Moreover, higher tariffs are only one aspect of the current administration’s agenda that could have significant ramifications for credit. Others include federal program reform, deregulation, tax cuts and immigration restrictions, “with effects depending on implementation, scope and timing,” said Fitch.
Although interest rate cuts have provided some relief to consumer and corporate borrowers, “conflicting potential pressures on rates from likely federal policies cloud future [Federal Reserve] policy,” Fitch said. “Inflationary pressures and structurally high rates could increase household and business debt burdens, leading to weaker asset performance.”
Higher interest rates may give a boost to bank revenues and net interest margins, but they can also result in lower loan demand, higher credit losses and/or higher funding and deposit costs, warned Fitch. That said, “We do not anticipate a reduction in credit availability as the Fed winds down quantitative tightening, as bank liquidity has stabilized and bank reserves will remain ample.”
The rating agency highlighted three areas to watch as 2025 progresses. They include:
- Persistent inflationary pressures and structurally high interest rates, which would increase cost and debt burdens on households and businesses, leading to higher delinquencies and defaults.
- The effects of tariff uncertainty on investment. Steep hikes in U.S. tariffs and retaliatory actions would mean higher prices and reduced growth, negatively affecting unemployment and asset performance.
- A reduction in direct federal funding or rescinding funds previously appropriated, potentially exerting pressure on credits across U.S. public finance, infrastructure, corporates and structured finance.