US economy braces for the largest tariffs in over a century

This is a segment from the Forward Guidance newsletter. To read full editions, subscribe.

---

As I write this piece, I’m in shock. 

The tariffs that President Trump announced yesterday were significantly larger than even the most aggressive of estimates.

The basics have already been discussed to death, but let’s summarize them anyway just to set things straight: Trump issued a blanket tariff of 10%. For 60 or so countries, there’s a tariff of roughly half of the “total sum of all unfair trade practices,” as calculated by the Trump administration.

As seen in this chart from the Budget Lab (a Yale think tank), the total weighting of all these tariffs leads to an effective tariff rate at 22.5%, which would be the highest it’s been in a century.

Other estimates are as high as 26.5% to 30%.

Now, how exactly did the Trump team quantify these estimates of tariffs imposed on the US? It turns out that it was a crass estimation of the country’s trade deficit divided by its exports.

In chart form, you get this extremely simplistic linear extrapolation:

I walked through the mechanics of how the Trump team calculated these estimates, because it’s important to grasp how little thought was put into coming up with the numbers. They quite literally made this simplistic estimation, then decided the reciprocal tariff would be half of that made up number to seem forgiving. It’s not forgiving. 

Now let’s move into discerning the economic impact of these announcements, assuming they hold (and given what we’ve seen from the administration so far, who the hell knows if they will). 

The Budget Lab analyzed the impacts of the tariffs and came up with the following: 

• Short-term: US real GDP growth in 2025 is expected to be 0.9% to 1.0% lower due to the tariffs.
• Long-term: The US economy is projected to be permanently 0.3% to 0.6% smaller — equivalent to an annual loss of $90 billion to $180 billion in 2024 dollars. Global GDP also shrinks in the long run, though China’s GDP remains largely unaffected, per the estimates. 
• Prices: The short-term price level on all goods rises by 2.1% to 2.6%, translating to a per-household consumer loss of $3,400 to $4,200 in 2024 dollars. Food prices specifically are projected to increase by 3.7%, nearly double the recent grocery inflation rate.

In chart form, the GDP hit looks something like this, and remember that this doesn’t even consider retaliation from other countries:

I liked the way Brad Setser, one of my favorite economists on trade, put it:

If you’re not familiar with the impact of oil shocks on the economy, the experience of seeing what follows (hint: a recession) is a sobering one. 

How likely is said recession? Well, Neil Dutta of Renaissance Macro has moved up his implied probability of recession to 89%. I listen when Neil warns about recession because he was one of the only economists who said a recession being imminent between 2022-2024 was nonsense whilst everyone else had their odds at 100%. 

Breathe in, breathe out. 

This is all under the assumption that these tariffs hold. I, as well as the market as a whole, seem to be in denial and think cooler heads will prevail. Let’s hope so. 

Buckle up — the uncertainty and volatility are only just getting started.

---

Get the news in your inbox. Explore Blockworks newsletters:

• Blockworks Daily: The newsletter that helps thousands of investors understand crypto and the markets, by Byron Gilliam.
• Empire: Start your morning with the top news and analysis to inform your day in crypto.
• Forward Guidance: Reporting and analysis on the growing intersection of crypto and macroeconomics, policy and finance.
• 0xResearch: Alpha directly in your inbox. Market highlights, data, degen trade ideas, governance updates, token performance and more.
• Lightspeed: Built for Solana investors, developers and community members. The latest from one of crypto’s hottest networks.
• The Drop: For crypto collectors and traders, covering apps, games, memes and more.
• Supply Shock: Tracking Bitcoin’s rise from internet plaything worth less than a penny to global phenomenon disrupting money as we know it.