Tariffs' True Impact: Growth, Not Inflation

As the US$1.4t tariff warning looms, the economic risks and potential responses from businesses are under scrutiny. While inflation is a significant concern, the biggest impact of tariffs could be on economic growth rather than inflation. Here's why:



1. Disruption of supply chains and increased costs: Tariffs can disrupt global supply chains by increasing costs for businesses that rely on imported components or finished goods. For instance, the tariffs on Chinese goods could lead to increased production costs for American manufacturers, as many rely on Chinese inputs. This, in turn, could result in higher prices for goods sold both domestically and internationally (Comin and Johnson 2022).
2. Reduced trade and economic growth: The imposition of tariffs on goods from Canada, Mexico, and China could trim 0.36 percentage points from U.S. GDP growth over the next 12 months, according to RSM's modeling. This reduction in economic growth is due to the increased costs and potential retaliation from these countries, which could lead to a decline in trade (RSM, 2025).
3. Geopolitical tensions and retaliation: Tariffs can exacerbate geopolitical tensions and lead to retaliation from affected countries. For instance, Canada and Mexico have promised retaliation against the U.S. tariffs, which could further disrupt trade and supply chains (RSM, 2025). Additionally, the U.S.-China trade dispute has already led to multiple rounds of tariffs and counter-tariffs, highlighting the potential for escalation and long-term damage to trade relations.

In conclusion, while tariffs can contribute to inflation by increasing the cost of goods and services, their true impact could be on economic growth. The disruption of supply chains, reduced trade, geopolitical tensions, and retaliation from affected countries could lead to a significant reduction in US GDP growth. Businesses should be prepared to adapt to these changes and consider strategic responses, such as sourcing alternatives, price adjustments, investment in automation, relocation of production, lobbying, and substitution, to mitigate the impacts of tariffs.