Investing.com -- The United States is on course to impose its highest average tariff rate since the 1940s, according to Citi strategists.
Citi had initially expected a 5 to 7.5 percentage point (ppt) increase in the effective tariff rate for 2025. But that projection has now been doubled to 10-15 ppt.
“This would translate into the highest average US tariff rate since the 1940s,” strategists led by Nathan Sheets said in a note. Such levels of protectionism are unprecedented in modern economies, which “have never seen such sizable and broad-based tariffs.”
Tariffs already implemented include 20% duties on Chinese imports related to fentanyl, as well as 25% tariffs on steel, aluminum, and certain Mexican and Canadian goods that do not comply with the USMCA agreement.
Citi estimates these existing measures alone account for a 6 ppt rise in the effective tariff rate, with additional hikes likely following the announcement of new reciprocal and sectoral tariffs expected on April 2.
These policies are expected to weigh on the U.S. economy by acting as both a supply shock—through higher input costs—and a demand shock—by dampening business sentiment and foreign incomes.
Strategists project the impact of these tariff policies will trim U.S. growth by roughly 0.5 ppt and increase inflation by a similar quantum this year.
“As the Fed tailors its response, we expect that it will initially be inclined to "look through" these effects,” strategists said. “But the sharp reversals in measures of sentiment strike us as concerning.”
“As such, we judge that the downside risks to growth are more imminent and severe than the upside risks to inflation,” they added.
The broader global implications are also significant. Countries with large trade surpluses with the U.S., including China, the European Union, Mexico, Vietnam, and Japan, could be prime targets for additional reciprocal tariffs.
Citi expects further increases to affect a wide range of sectors, potentially including automobiles, pharmaceuticals, and semiconductors.
The tariff policies have weighed on investor sentiment as well. Citi notes that economic sentiment indicators, including consumer and small business confidence, have declined in recent months, while policy uncertainty has surged.
“It’s fair to say that the boost to ‘animal spirits’ following the November election is now fading,” the report noted.
On a more positive note, the “hard data” for the U.S. has remained relatively strong, with the growth in the rest of the world also being stable. Job growth remains solid, unemployment steady, and consumption has slightly slowed but continues overall.