US Economy Faces 1% GDP Decline as Trade War Escalates with Retaliatory Tariffs

Citi Economist Warns of Economic Slowdown as Canada, Mexico, and China Strike Back

Washington, D.C., March 5, 2025 – The United States economy could shrink by 1% over the next few quarters if retaliatory tariffs from key trading partners take effect, warns Robert Sockin, Global Economist at Citi. His cautionary outlook highlights the rising economic uncertainty surrounding the latest tariff hikes, which threaten to increase inflation, disrupt trade, and slow economic growth.

With the US imposing a 25% tariff on imports from Mexico and Canada as of March 4, retaliatory measures have swiftly followed, raising the risk of a prolonged trade war. The tariffs impact $1.5 trillion in annual trade, marking a major shift in North American economic relations.

Citi’s Warning: Trade War Could Weigh on US Growth

Speaking to CNBC-TV18, Sockin expressed concerns over the persistence of these tariffs and their broader implications:

“If these tariffs remain in place for an extended period and trading partners retaliate, the US GDP could shrink by 1% over several quarters,” he stated.

Key Risks Identified by Citi’s Economist:

1. GDP Decline: The US economy could see a 1% contraction over the coming quarters due to supply chain disruptions and declining export demand.
2. Rising Inflation: Inflation could increase by half a percentage point as import costs surge, further squeezing consumer spending.
3. Stagflationary Pressures: Sockin warned that retaliatory tariffs could amplify stagflationary effects, creating a “large, negative hit” on real economic growth.
4. Increased Market Volatility: Trade tensions have already shaken global financial markets, sending US and Asian stock indices tumbling.

“It’s a difficult and dangerous balancing act,” Sockin added, underscoring that America is not immune to the negative effects of its own tariff policies.

Canada and Mexico Strike Back: Retaliatory Tariffs Could Disrupt Trade

Following Trump’s tariff imposition, both Canada and Mexico swiftly announced countermeasures:

• Canada has vowed to impose duties on US imports that will remain in place until the US tariffs are withdrawn.
• Mexico has introduced similar measures, targeting key American exports.
• Experts warn that these counter-tariffs could derail the USMCA trade pact—a key agreement Trump negotiated during his first term.

The economic damage will be most severe for Canada and Mexico, given their heavy reliance on the US market. However, Sockin emphasized that the US will also suffer consequences, as retaliatory tariffs hit key American industries such as automobiles, agriculture, and manufacturing.

China Enters the Trade War: Tariffs on US Exports Escalate Global Tensions

In a dramatic escalation, China has imposed new tariffs on American exports, citing the US’s “unilateral tariff increases” as a violation of fair trade.

China’s Counter-Tariffs Include:

• Up to 15% tariffs on US agricultural exports, including soybeans, chicken, beef, and cotton.
• Adding 10 American companies to its ‘Unreliable Entity List’, restricting their access to the Chinese market.

In a strongly worded statement, China’s Ministry of Finance condemned the US action, saying:

“The US’s unilateral tariff increase damages the multilateral trading system, increases the burden on US companies and consumers, and undermines the foundation of economic and trade cooperation between China and the US.”

This move signals that China is prepared for an extended trade battle, further straining US-China relations.

Market Fallout: Worst Day for S&P 500 in 2025, Asian Markets Plunge

Financial markets have already reacted negatively to the escalating trade tensions:

• The S&P 500 recorded its worst day of 2025, with major losses across key sectors.
• Asian stock markets tumbled, with indices hitting their lowest levels in a month.
• US dollar weakened, reflecting investor concerns over economic uncertainty.

Why Investors Are Worried:

1. Higher tariffs could slow down global trade, leading to reduced corporate earnings.
2. Companies relying on global supply chains—such as automakers and retailers—face higher production costs.
3. Increased inflationary pressures could force the Federal Reserve to maintain high interest rates for longer, further pressuring economic growth.

Trump Doubles Down on Trade War Strategy

Despite growing concerns, Trump remains firm on his tariff stance, stating that there is no room for negotiation at this point.

• The administration has doubled tariffs on Chinese imports, raising them to 20%.
• Trump’s economic team argues that tariffs will protect American manufacturing, despite widespread criticism from economists and business leaders.
• The White House insists that the move is necessary to reduce the US trade deficit and force trading partners into fairer agreements.

However, many experts warn that these tariffs could backfire, ultimately hurting US businesses and consumers more than they help.

What’s Next? Uncertainty Looms Over Global Trade

With Canada, Mexico, and China now actively retaliating, the risk of a full-scale trade war is higher than ever.

Questions Moving Forward:

• Will the US negotiate a tariff rollback, or will the trade war escalate further?
• How will American consumers react to rising prices?
• Will the Federal Reserve adjust its policies in response to inflation risks?
• How will the US elections impact future trade policies?

For now, global markets remain on edge, and economists are bracing for a prolonged period of economic volatility.

Bottom Line: The US real GDP is at risk of a 1% contraction, inflation is rising, and retaliatory tariffs from key trading partners could significantly disrupt global trade. If Trump’s hardline tariff policies persist, the US economy may be headed for turbulent times ahead.