Will High Tariffs Push The U.S. Into Recession?

2025-04-09 06:30:00 ET

Summary

• Base case - There could be a stalemate with most tariffs remaining at existing levels for most of this year. This would likely send the US economy into recession.
• Downside scenario - Most countries could respond with retaliatory tariffs, resulting in a global tariff war, global recession and stagflationary conditions in the US.
• Upside scenario - Most countries could reduce their protectionist policies against US goods, and the US could reduce its tariffs. Or the tariffs could be challenged in the courts and struck down.

What a difference a week makes. We started last week with some trepidation about “Liberation Day,” but markets assumed that US President Donald Trump wouldn’t apply extremely high tariffs to trading partners because of the negative impact it would have on the US consumer and economy. In fact, the S&P 500 Index actually finished higher the day before Liberation Day, as markets tilted optimistic while waiting for the tariffs to be announced. But those assumptions were wrong.

The tariffs were billed as “reciprocal tariffs” and had been hyped as being gentler, representing only half of what each country had levied against the US. But this is a misnomer; these reciprocal tariffs aren’t based on the tariffs each country has levied against the US. Instead, they’re based on each individual country’s bilateral trade deficit as a share of its exports to the US. Then that’s divided by two (hence the “discounted” rate), with a minimum rate of 10% on all imports into the US. In other words, it’s a function of a variety of factors (which might include trade barriers), but it also includes comparative advantage and free will in the context of free trade.

Complicating the situation is that Congress has largely abdicated its power to make decisions on tariffs by passing laws that allow the president to impose tariffs unilaterally for national security reasons. These “Liberation Day” tariffs are not Section 232 tariffs or Section 301 tariffs. They’re being enacted under the International Emergency Economic Powers Act (IEEPA), which provides the president broad authority to regulate a variety of economic transactions following a declaration of national emergency. IEEPA creates broad powers that can be self-triggered, since the president has the power to declare a national emergency, which has led to a variety of administrations using this tool. In the past, IEEPA has triggered smaller, more surgical trade actions. This time around, it’s triggered a bazooka. Not surprisingly, that bazooka has triggered a massive market sell-off, not just in the US but around the world. So, the Trump administration has virtually unilateral power to wage this trade war , even if much of the US electorate and business leaders don’t support it....

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