Robert Sockin, Global Economist at Citi, believes that the new US tariffs could lead to stagflation and economic challenges, but they may not last long due to their potential impact on the stock market.

With 25% tariffs on Canada and Mexico and an additional 20% effective tariff on China, markets have been jittery about their long-term economic effects.

A key factor in their longevity, according to Sockin, is Trump’s sensitivity to stock market performance. "We know from Trump's first term that he cares a lot about the performance of the economy and the performance of the stock market. And it seems that under fairly large tariff scenarios, the economy is challenged and the stock market is challenged." This, Sockin noted, raises the possibility that the tariffs are being used as a negotiating tactic rather than a long-term policy.

Citi forecasts that prolonged tariffs could shave over 1% off US real GDP over several quarters while also pushing inflation higher.

"You are looking at a world where, if our trading partners retaliate, which seems very likely, the stagflationary effects on the US are amplified," he said.

Citi’s economic models suggest that Canada and Mexico would bear the brunt of the damage due to their deep economic ties with the US.

The uncertainty surrounding tariffs puts the US Federal Reserve in a difficult position. Sockin believes that if broad-based tariffs are implemented lead to a significant growth slowdown, "The Fed would be cutting in that environment." However, he stressed the need for continuous monitoring of policy developments and economic data before any major policy shifts.

Despite global trade tensions, Sockin remained optimistic about India’s economic trajectory, noting that it has been one of the best-performing emerging markets.

Citi's forecast for Indian growth is roughly in line with last year’s pace, which was solid in the mid-6% range, he said.

However, he also acknowledged that India may not be fully insulated from global trade disruptions and will need to navigate the evolving geopolitical landscape carefully.

On China, Sockin highlighted a mix of domestic economic challenges and external risks from US tariffs. Citi’s forecast expects China’s growth to slow from 5% last year to approximately 4.2%, assuming tariff increases persist. However, Chinese authorities may counteract these effects with further stimulus measures. "We have to watch both the US space closely for the tariffs and how the Chinese authorities respond," Sockin said.