The Bank for International Settlements published a BIS Bulletin analysing the macroeconomic effects of tariff hikes and trade policy uncertainty, combining a discussion of transmission channels with quantitative estimates from trade models. It concludes that tariffs tend to lower output growth across economies and, in many scenarios, raise inflation, with indirect channels and persistent uncertainty potentially amplifying the hit to activity and complicating monetary policy trade-offs. The Bulletin highlights the direct trade channel as the main immediate mechanism, via lower trade volumes and higher prices. For tariff-imposing countries, higher import prices can depress real income and demand and act as a stagflationary shock, while tariffed economies may mainly face weaker export demand. Across a range of model-based estimates, near- to medium-term United States growth is projected to fall by about 1 percentage point, with smaller and more model-dependent impacts for the euro area and China; in high-tariff scenarios with retaliation, Canada and Mexico are estimated to face particularly strong stagflationary effects after the United States. Beyond these direct effects, the analysis points to risks from supply chain disruptions and trade diversion, and notes that elevated trade policy uncertainty can delay investment and durable consumption, with empirical evidence suggesting prolonged uncertainty can materially drag on GDP and shift growth-at-risk outcomes lower. Financial conditions are presented as an important buffer so far, with a short-lived risk-asset sell-off after the 2 April 2025 “Liberation Day” shock and firms increasing liquidity by securing credit lines in late 2024. The Bulletin cautions that this cushioning may not last if risk appetite weakens and financial vulnerabilities intensify, and it flags that many tradable-sector firms in the United States, euro area, United Kingdom and several emerging market economies typically have limited liquidity to sustain operations for more than a quarter without fresh cash flows.
Bank for International Settlements 2025-08-12
Bank for International Settlements Bulletin examines how tariffs and trade policy uncertainty could weaken growth and raise inflation
The Bank for International Settlements' BIS Bulletin analyzes the macroeconomic impacts of tariff hikes and trade policy uncertainty, noting tariffs reduce output growth and can increase inflation. It identifies the direct trade channel as the primary mechanism, with higher import prices causing stagflationary effects in tariff-imposing countries and weaker export demand in tariffed economies. It warns of risks from supply chain disruptions and trade diversion, noting prolonged trade policy uncertainty can significantly impact GDP and growth-at-risk outcomes.