S&P Global Ratings hasn't formally revised its economic forecast for the U.S. following the country's Feb. 1 announcement about tariffs on Canadian, Mexican, and Chinese imports. However, if the U.S. ultimately follows through on the tariffs it announced for Canada and Mexico, and if those tariffs stay in place, we could change our baseline U.S. economic forecast.

Assuming the tariffs stay in place through 2025, U.S. consumer prices could see a one-time rise of--according to our rough estimate--between 0.5% and 0.7%. In addition, the inflation rate itself could approach 3% by the fourth quarter of 2025. Currency adjustment, product substitution, and cost absorption along the way from exporter to consumer may all offer some relief, but it would likely be limited.

We think the tariffs' impact on U.S. real GDP growth is more difficult to pin down without making very aggressive assumptions. Still, our rough estimate suggests that U.S. real GDP over the next 12 months could be 0.6% lower than what we're currently forecasting--accounting for a decrease in households' purchasing power, elevated investment uncertainty, and a hit to American exporters.

And in this kind of macro environment, our sense is that the Federal Reserve would likely err on the side of keeping inflation expectations anchored. In this scenario, the Fed would pause its rate-cutting cycle earlier than we currently anticipate, there would be no rate cuts this year, and the journey to the neutral rate likely wouldn't resume before mid-2026.

S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).

This report offers our directional guidance (that is, our first-order estimates) on how the announced tariff actions might affect our forecasts for key U.S. macroeconomic variables if they're fully implemented.

What's Happening

U.S. President Donald Trump's administration initially announced that tariffs on merchandise goods imported from Canada, Mexico, and China would take effect on Feb. 4. 

• Energy imports from Canada would face a 10% tariff, while all other goods imports from Canada would face a 25% tariff.
• All Mexican goods would see a 25% tariff.
• All Chinese goods would see an additional 10% tariff (close to what we've already incorporated into our baseline forecast).

The U.S. delayed the new tariffs on Canadian and Mexican goods until March 1, but the tariff hike on Chinese goods did take effect, as scheduled.

How long the tariffs would remain in place isn't clear. (For the purposes of this report, we assume that renegotiations over the United States-Mexico-Canada Agreement will begin in early 2026, and that it will be re-ratified by mid-2026. As such, we assume for this report that the tariffs on Canadian and Mexican goods will last through 2025, before they gradually return to the less-than-1% tariff regime under the trade agreement.)

President Trump has said he'll impose the tariffs until the number of migrants entering the U.S. decreases and the flow of fentanyl into the country slows.  In the past, President Trump removed tariffs once the targeted countries complied with some demands or made some concessions. But with these new tariff actions, it's not yet clear what Canada, Mexico, and China would need to do, in concrete terms, for the U.S. to reverse them.

Canada and Mexico combined account for less of America's merchandise-goods trade deficit than China does, but they also account for 29% of the goods that the U.S. imports overall (see table 1). In addition, energy products account for 30% of what the U.S. imports from Canada.

The U.S. imports 43% of its goods from Canada, Mexico, and China combined.

Table 1

In response to the U.S. tariff announcement, Canada announced its own 25% tariff on C$155 billion (roughly US$105 billion) of imported U.S. products. (Canada would enforce it if the U.S. activates the tariffs it announced for Canadian goods.) News reports say the premiers of Canada's provinces and territories are crafting individual measures in response to the U.S. tariffs; that process will continue to unfold in the days ahead.

Some of the measures that have already been announced include limiting provincial procurement by American companies and stopping sales of U.S. alcohol; some provinces are focusing their measures on products made in U.S. states where the Republican Party has governing control. Provinces and territories are also reviewing potential nontariff measures.

Mexico has also responded to the U.S. tariff announcement, signaling its intent to impose its own measures.

What Does This Mean For U.S. Inflation?

Our first-order estimate sees a one-time 0.66% increase in U.S. consumer prices, assuming the announced U.S. tariffs are fully implemented--and up to four-fifths of that increase would be due to the tariffs on Canada and Mexico. This first-order estimate accounts for:

• Increases in effective tariff rates;
• The import content of U.S. consumer spending; and
• A 75% pass-through to consumer prices, after considering mitigating factors (exchange rates, product substitution, and the distribution of costs along the supply chain).

The new tariffs could raise the effective tariff rate on all U.S. imports by 8 percentage points, to 10.3% from 2.3%.  Tariffs on imports from Canada and Mexico would account for a combined 6.7 percentage points. The announced 10% tariff hike on imports from China would add 1.3 percentage points.

The share of import content in U.S. consumer spending would limit the new tariffs' impact on consumer prices.  About 11% of U.S. consumption can be traced to imports, according to research by the Federal Reserve Bank of San Francisco. In other words, 11 cents of every dollar spent by Americans reflects the cost of imports at various stages of production through input-output linkages. The relative importance of the major trading partners in U.S. imports has changed over time, but this ratio has remained steady.

Exchange-rate movement would only have a small effect on the prices of U.S. imports.  In theory, a stronger U.S. dollar would help counter the impact of the new tariffs. However, the pass-through effects of exchange-rate changes on the prices of imports in the U.S. are low--over 90% of its imports are priced in U.S. dollars. The exchange-rate pass-through into overall import prices is below 40%--and for consumer-goods imports (excluding autos), the exchange-rate pass-through is likely less than half of that. Using 2007-2024 data, we see an implied pass-through of only 12% (see chart 1).

The broad trade-weighted U.S. dollar has appreciated more than 6% since October 2024, with the Canadian dollar down 8%, the Mexican peso down 6%, and the Chinese renminbi down 4%. Even if the U.S. dollar appreciates further--which we think is likely--it would only offset a fraction of the impact of the new tariffs.

Chart 1

Product substitution likely wouldn't have a major effect in the near term.  The rerouting of supply (either to domestic producers or producers in other foreign countries) would help limit the increase in prices for American importers. But it likely wouldn't be a game changer in the near term.

First, U.S. refiners, manufacturers, and homebuilders currently have limited scope to substitute for goods imported from Canada and Mexico. Our sense is that most of the demand for imports from those two countries is relatively price inelastic in the near term. Cars, gasoline, and homebuilding materials--all so integral to American life--would all be affected by the tariffs, with little in the way of substitution (see chart 2).

Chart 2

• Out of all the crude oil that the U.S. refines, nearly 24% is imported from Canada; of that amount, 84% goes toward U.S. domestic consumption. A 10% tariff would push up average U.S. crude oil prices by 2%; that would mean about 7 cents more per gallon at the pump, given today's average price of gasoline.
• Motor vehicle production is also very integrated across the three countries, with some parts crossing borders several times before a finished vehicle rolls off the production line. These parts could be subject to tariffs multiple times, known as "tariff pancaking."
• And higher softwood lumber prices would raise the cost of building new homes. U.S. homebuilders, who are already giving discounts to move their inventory, would be hard-pressed to pass on those costs to homebuyers.

Second, a successful rerouting of supply would depend on how aggressive the Trump administration is in preventing such rerouting--especially the rerouting of Chinese exports through other countries. This could be one of the key sticking points during the upcoming negotiations over the renewal of the United States-Mexico-Canada Agreement (negotiations that would likely be pulled forward).

Third, some U.S. demand may eventually shift to domestic sources, but there would still be higher prices for those goods. For goods produced domestically, there's also a possibility that those companies would take the opportunity to raise prices, either to maintain or boost profits, or to counter increases in their own input costs due to the tariffs.

Contracts tend to be sticky, supply chains need time to reconfigure, and--if the 2018-2019 experience is any indication--foreign exporters may not absorb the costs of tariffs. Researchers from Stanford University found that the tariffs the U.S. imposed in 2018 didn't affect the prices of goods produced by Chinese exporters, and that higher export prices stemming from the 2018 tariffs were completely passed on to U.S. consumers.

What Does It Mean For U.S. Real GDP Growth?

With the announced tariffs, U.S. real GDP over the next 12 months could be--according to our first-order estimate--0.6% lower than what we're currently forecasting. This accounts for a decrease in U.S. households' real income, elevated investment uncertainty, and a hit to American exporters (both from the measures that Canada would impose and from a decline in general export competitiveness).

U.S. consumers may see only a modest 1% decrease in aftertax income, according to an analysis by the Tax Policy Center.  Still, tariffs are a regressive tax, with the lowest-income quintile of households (which have a higher marginal propensity to consume out of their income) being worse off than the highest-income quintile of households. Applying a standard marginal propensity to consume, we estimate that the new tariffs would likely cause--specifically via the consumer spending channel--GDP between early 2025 and early 2026 to be 0.2%-0.3% lower than what we're currently forecasting.

Rolling tariff threats would weigh on business investment, while the U.S. dollar's appreciation against foreign currencies would hurt the competitiveness of U.S. exports.  The hit to Canadian and Mexican demand would further weigh on U.S. exports; notably, Canada is America's largest export market. Trade elasticities of income and exchange rates suggest that imports into the U.S., which are negative for GDP accounting, would also likely decline--but not enough to offset the hit to U.S. exports.

Chart 3

These estimates for growth are preliminary. We have not analyzed this scenario through our global general equilibrium macro model, and the estimates do not necessarily capture all of the interactions between macroeconomic variables. Ultimately, the impact of the new tariffs, if they're fully implemented, would depend on:

• The extent to which some products receive exemptions;
• How tariff revenue is recycled into additional subsidies, perhaps to benefit farmers or exporters hurt by trading partners' responses to the U.S. tariffs;
• Shifts in import originations;
• What happens to the U.S. dollar;
• The duration of the tariffs (as well as markets' perception of how long the tariffs may last); and
• How the Fed uses monetary policy to fight related inflationary pressures.

The tariffs' long-term impact on U.S. growth would also depend on whether the country's new trade policy results in a material reorientation of trade and investment among the U.S. and its trading partners.

What About The Fed?

The new tariffs would likely close the window for further easing by the Fed.  We're now more confident in our view that there will be a detour in the broader journey toward a neutral policy rate, assuming the announced tariffs are fully implemented.

In the economic forecast we published in November 2024, we anticipated that the Fed would reach an inflation-neutral policy rate by the end of 2026 (see "Economic Outlook U.S. Q1 2025: Steady Growth, Significant Policy Uncertainty"). We updated our view in January 2025, seeing one 25-bp rate cut in the first half of this year, followed by a long pause and then renewed easing beginning in the second half of 2026; the Fed would reach a neutral policy rate in 2027 (see "The Fed Is In Limbo").

But with the new tariff announcement (and with more tariffs likely to come, on other countries), a short-term conflict between the Fed's inflation and employment mandates could disrupt the progress toward a neutral rate.

The Fed may have to do a delicate dance between higher inflation (driven by a supply shock) and softening demand growth.  Inflation in the prices of goods and services--due to the new tariffs, a labor shortage, and expected fiscal stimulus in 2026--could lead to the Fed having to choose between accepting temporarily stronger inflation or higher interest rates (which should cool economic activity and increase unemployment).

We suspect the Fed is more sensitive now to the risk of unmoored inflation expectations, especially after the inflation surge during the pandemic. That would raise the likelihood of higher interest rates, which would also likely be accompanied by lower economic growth--a mix that isn't conducive to investor returns.

Table 2

Either way, it promises to be another challenging year for Fed policymakers, who will have to anticipate President Trump's policies and investors front-running the Fed's actions.

Related Research

S&P Global Ratings research

• Economic Research: Macro Effects of Proposed U.S. Tariffs Are Negative All-Around, Feb. 6, 2025
• U.S. Capital Goods Brief: Tariffs Would Test Pricing Power, Feb. 6, 2025
• Proposed Tariffs Could Hurt the Global Tech Sector If Levied Too Long, Feb. 4, 2025
• A 25% Tariff Would Create New Trade Challenges for Mexican Corporations, Feb. 3, 2025
• The Fed Is In Limbo, Jan. 30, 2025
• Economic Research: Which Sectors Would be Most Vulnerable to U.S. Tariffs on Canada and Mexico, Jan. 30, 2025
• Auto Industry Buckles Up for Trump's Proposed Tariffs on Car Imports, Nov. 29, 2024
• Economic Outlook U.S. Q1 2025: Steady Growth, Significant Policy Uncertainty, Nov. 26, 2024
• U.S. Elections 2024: How Could A Second Trump Term Affect U.S. Credit?, Nov. 7, 2024
• Long-Term U.S. Tech Ratings Will Be Tested By Geopolitical And Trade Uncertainties, Sept. 4, 2024

External research

• A 25 Percent Tariff on Canadian and Mexican Imports Would Reduce Consumers' Average After-Tax Income by 1 Percent, published by Lillian Hunter for the Tax Policy Center on Jan. 31, 2025
• The Impacts of the U.S. Trade War on Chinese Exporters, published by Yang Jiao and others in The Review of Economics and Statistics on Nov. 7, 2024
• Canada's crude oil has an increasingly significant role in U.S. refineries, published by the U.S. Energy Information Administration on Aug. 1, 2024
• Pass-through of shocks into different U.S. prices, published by Hakan Yilmazkuday in the Review of International Economics on Jan. 2, 2024
• Estimating the marginal propensity to consume using the distributions of income, consumption, and wealth, published by Jonathan D. Fisher and others in the Journal of Macroeconomics in September 2020
• Dominant Currency Paradigm, published by Gita Gopinath and others in the American Economic Review in March 2020
• How Much Do We Spend on Imports?, published by the Federal Reserve Bank of San Francisco on Jan. 7, 2019
• The International Price System, authored by Gita Gopinath for the 2015 Jackson Hole Economic Policy Symposium