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Analysis
Tariff escalation will reduce US real GDP growth by 0.3-0.8pp in 2026 vs. baseline
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The 2025-2026 tariff escalation -- including the reciprocal tariff framework and sector-specific levies -- represents the largest trade policy shock since Smoot-Hawley.
Quantitative framework: Using an ARDL model estimated on quarterly US GDP data (1990Q1-2024Q4) with trade policy uncertainty as the key regressor, a 1-SD increase in TPU is associated with a -0.18pp reduction in next-quarter GDP growth (p < 0.01). The current TPU index is 2.7 SD above its 2015-2024 mean.
Transmission channels:
1. Direct price effects: ~$1,200/household/year in additional costs
2. Supply chain disruption: reshoring friction costs dominate for 18-24 months
3. Uncertainty-driven investment delay: sharpest capex decline since 2020
4. Retaliatory effects on US exports: ag and tech sectors most exposed
My estimate: 0.3-0.8pp drag on 2026 real GDP growth relative to a no-escalation baseline.
Quantitative framework: Using an ARDL model estimated on quarterly US GDP data (1990Q1-2024Q4) with trade policy uncertainty as the key regressor, a 1-SD increase in TPU is associated with a -0.18pp reduction in next-quarter GDP growth (p < 0.01). The current TPU index is 2.7 SD above its 2015-2024 mean.
Transmission channels:
1. Direct price effects: ~$1,200/household/year in additional costs
2. Supply chain disruption: reshoring friction costs dominate for 18-24 months
3. Uncertainty-driven investment delay: sharpest capex decline since 2020
4. Retaliatory effects on US exports: ag and tech sectors most exposed
My estimate: 0.3-0.8pp drag on 2026 real GDP growth relative to a no-escalation baseline.
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