Fitch says US tariffs reach levels transforming global economic outlook, raising recession risks

• States ‘Liberation Day’ takes US tariff rate back to level last seen in 1909
• Estimates changes will raise overall US ETR to 25%, significantly higher than 18% it assumed for 2025 in March Global Economic Outlook, highest rate in over 115 years
• Opines Latin America will benefit, though broad-based nature of tariff hikes constrains scope for trade diversion, underlining likely adverse effects all round

Fitch Ratings yesterday said US tariffs have reached levels that are transforming the global economic outlook, significantly raising US recession risks and constraining the Federal Reserve’s ability to lower interest rates further.

The ‘Liberation Day’ tariff increases outlined by the US Government on 2 April sharply exceeded the already steep rises assumed in its March 2025 Global Economic Outlook (GEO).

These increases impose a minimum tariff rate of 10% for all US trade partners and sizeable additional increases on a subset of 57 trade partners. The adjustments take US effective tariff rates (ETR) to about 20% for imports from the EU and about 64% for China, above its March assumed levels of 15% and 35%, respectively. Other Asian economies will also face much higher tariffs, including Vietnam (a 46% rate), Thailand (36%), Taiwan (32%), India (26%), Korea (25%), Malaysia (24%), and Japan (24%). The country-specific rates allow for the exclusion of sectors where product-specific tariffs remain under discussion, for example for semiconductors, pharmaceuticals, copper and lumber.

“We estimate the changes will raise the overall US ETR to about 25%, which would be significantly higher than the 18% we had assumed for 2025 in the March GEO and the highest rate for more than 115 years,” it added.

“US growth in 2025 is likely to be slower than the 1.7% that we had projected in March, given higher-than-anticipated tariffs. Recent US consumer sentiment indicators have weakened sharply against a backdrop of equity market volatility, and US consumer spending growth slowed notably in January and February.”

Tariff hikes will result in higher consumer prices and lower corporate profits in the US. Higher prices will squeeze real wages, weighing on consumer spending, while lower profits and policy uncertainty will act as a drag on business investment. Upward pressure on goods prices from tariffs – in the context of a recent large jump in US households’ medium-term inflation expectations – means the Fed is likely to become more cautious about further rate cuts in the near term. Fitch expects these effects will likely outweigh the benefits US companies might gain from increased protection against foreign competition.

Growth prospects for the rest of the world have also deteriorated since the March GEO projections, particularly in Asia. 

“We think some countries, notably in Latin America where most will face the minimum 10% US tariff rate, could benefit at the margin from trade and investment diversion effects, which would support their economic prospects despite challenges from weaker global demand. However, the broad-based nature of the tariff hikes constrains the scope for trade diversion, underlining the likelihood that the trade war will have adverse effects all round,” Fitch noted.

Monetary and fiscal policy easing could help targeted countries offset the impact of higher US tariffs. Some governments may also have room to negotiate better bilateral tariff deals with the US over time. Conversely, the strong possibility of retaliation by key trade partners raises the risk of further escalation, with the US potentially raising tariff rates even further on countries that take retaliatory trade action.

The effect of higher US tariffs on the creditworthiness of individual sovereigns is highly uncertain. However, some sovereigns where the level of value-added in exports to the US is large as a share of GDP could face downward pressure on ratings as US tariffs rise sharply, depending on the evolution of other credit factors and rating headroom. The influence of tariffs on growth prospects and public finances, which is likely to be shaped by policy responses, will be a key factor in its sovereign rating assessments.