First Quarter GDP Numbers Highlight Tariff Impacts
Last month, U.S. GDP estimates for the first quarter of 2025 were released, and unsurprisingly the overarching theme was the impact of tariffs.
The country saw an estimated 0.3% decline in domestic production, primarily driven by increased imports.
As Harvard economist Jason Furman points out, the first quarter change in real imports as a percent of GDP was the second largest ever recorded (beaten only by the pandemic supply shock of 2020).
While imports in and of themselves do not reduce GDP, increases in imports can signify that investment and consumption shifted away from domestic producers and toward foreign producers.
First quarter data clearly shows that businesses attempted to import critical goods ahead of the scheduled tariffs—as evidenced by the simultaneous run-up in imports and inventories.
Quarterly real final sales to domestic purchasers, what some economists refer to as “core GDP,” was more positive, growing at a 3% annualized rate for the quarter.
Regardless, disentangling the “general” economy from the behavior induced by tariff policy will be challenging until we have more data.
Impact on Connecticut’s Economy
Extrapolating national trends to make regional predictions about economic growth is difficult, but given the impact of tariff policy on the national economy it is fair to assume the effects in Connecticut will be substantial as well.
We can already see from trade data that imports to Connecticut have been ticking up in the first months of 2025, with January and February imports growing 22% and 29% year-over-year respectively.
These readings indicate that Connecticut businesses and consumers are behaving similarly to our national peers with respect to tariff avoidance.
This behavior makes sense considering we estimate tariffs could cost the Connecticut economy more than $3 billion over the next year.
How the state fares relative to the nation overall is contingent on a number of factors. For example, Connecticut is less exposed to imports relative to the country as a whole, at least directly.
In 2024, Connecticut imports were equal to 6.2% of the state’s GDP whereas the U.S. imported goods valued at 11.2% of GDP.
However, these figures are based on the final destination of goods imported from abroad.
Many of the goods we use here in the state are imported from abroad to a supplier in another state and then ultimately sold in Connecticut, and these figures do not consider the impact of those trade linkages.
Imported Goods
We should also consider what we import directly to the state.
In 2024, Connecticut imported $22.7 billion in commodities according to U.S. Census Bureau bureau data, driven by these top five commodity categories:
- Aircraft, spacecraft, and parts ($3.13 billion)
- Nuclear reactors, boilers, machinery, etc. ($3.04 billion)
- Stones, pearls, and precious metals ($2.49 billion)
- Mineral fuel, oil, etc. ($2.45 billion)
- Electric machinery, sound equipment, TV equipment ($1.61 billion).
Clearly, the commodities the state imports are critical to key industries in the state such as aerospace manufacturing, submarine construction, and nuclear energy.
Imports for items used in nuclear energy are especially interesting as these will be taxed while other energy imports are, to date, exempt from tariffs.
Our top two import categories are also both high value-added goods as opposed to commodities or cheap inputs.
Generic commodities are often substitutable where buyers can change suppliers to reduce costs.
High value-added goods are often difficult to substitute to different producers, thus buyers bear much of the cost of a new tariff, resulting in a greater absolute tariff incidence.
Import Partners
Further, where we source our imports is important.
In 2024, our top import partners were Canada ($5.74 billion), Mexico ($3.6 billion), Germany ($1.6 billion), Netherlands ($1.38 billion), and China ($1.34 billion).
However, if we consider the European Union to be a single trading entity, then that becomes our largest import partner at $6.6 billion.
How trade negotiations proceed with each of these countries will have a significant effect on how our economy is impacted.
The announced agreement with the UK still leaves the tariff rate at 10%, a substantial increase over previous tariffs.
For example, the announced agreement with the UK still leaves the tariff rate at 10%, a substantial increase over previous tariffs.
China presents an especially interesting case. While it is a small trading partner relative to the U.S. overall, the size of the proposed tariffs and the type of goods that we import from China will likely create problems for Connecticut businesses.
In decades past we may have imported significant sums of low-value goods, but in 2024 the top two imports from China were electric machinery parts and nuclear reactors, boilers, and machinery parts.
We might assume that high value goods like these may be harder to procure from lower tariff jurisdictions, meaning Connecticut buyers will likely bear a significant burden on those inputs in the near term.
Small Manufacturers at Risk
Finally, who imports goods will impact the state’s economy.
As is often pointed out, Connecticut is the land of small manufacturers. Recent U.S. Census data further supports this, showing that in 2022 manufacturers employing fewer than 200 people made up 36.3% of sector employment, while that figure for the U.S. was only 30.8%.
There are advantages to having a small business led manufacturing ecosystem, but in the near term we might expect these businesses to struggle to shift supply chains relative to larger peers.
Even if many of these businesses maintain domestic supply chains, there will be near-term costs that could negatively impact investment and employment plans in the sector.
The magnitude of those impacts remain to be seen, but the exposure of our small manufacturers to tariffs should be a concern going forward.
Recent Trade Deals
The Trump administration has stated that it will, over the coming months, negotiate trade deals with each country which may reduce the overall size of the tariff burden.
So far there have been two deals announced, one with the UK and one with China.
For the UK, very little has changed as a result of the deal. Overall tariffs remain flat at 10% for imported items, while the UK lowered some but not all tariffs on goods the U.S. sends there.
The U.S. tariff rate is still four times higher than it was prior to the new tariffs taking effect.
For Connecticut, this means significantly higher import duties on important items such as fabricated metal products, chemicals, computer and electronic products, transportation equipment, and machinery—the top five imports from the UK outside of energy products.
Tariffs on UK imports from could cost Connecticut businesses upwards of $34.3 million in additional import taxes.
Those five categories accounted for $455.8 million in imports from the UK in 2024, meaning tariffs on just those products from could cost Connecticut businesses upwards of $34.3 million in additional import taxes this year.
For China, the recent pause on tariffs lowers tariffs on imports significantly, from 145% to 30%, but that is still 45% higher than earlier tariffs and is only in effect for 90 days.
Connecticut imported $1.34 billion in goods from China in 2024, meaning the 30% tariff, if it ultimately remains in effect long term, will still cost businesses upwards of $121 million in additional taxes this year.
Once again it should be noted that these are the direct import costs to Connecticut.
Businesses across the state will also be burdened by the costs of imports elsewhere in the country as the weight of tariffs spreads through the economy.
Conclusion
Tariffs are the obvious economic story to watch over the coming months, the effects of which we will only begin to see as we enter the latter half of the second quarter and the beginning of the third quarter.
Businesses from small to large are sounding the alarm on the impact the tariffs will have on the economy, and Connecticut will not be immune to those effects.
Combined with recent labor strikes, federal funding cuts, and market volatility, our state faces considerable economic headwinds that we were not expecting even a few months ago.
Continuing to implement policies on a statewide level that support stability in the economy will be critical in this era of uncertainty.
About the author: Dustin Nord is director of the CBIA Foundation for Economic Growth & Opportunity.
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