The Economic Consequences of the Tariff War

[Passages]

The economy was already stalling out before Liberation Day. A trade war on the entire world will only make everything worse.

by David Dayen April 9, 2025

Investors got some ephemeral relief from Donald Trump’s tariff nonsense on Tuesday when Treasury Secretary Scott Bessent announced formal negotiations with Japan aimed at reaching an agreement, signaling that much of the tariff implementation was perhaps a prelude to a deal. But then Trump announced that an additional 50 percent tariff would be placed on China, in retaliation for their own retaliatory tariffs in response to the initial order, making clear that at least with respect to the world’s largest manufacturer, a trade war is far more likely. Stocks fell on that news. And today, the largest tariffs all take effect.

The important thing to understand is that the economy was spiraling in ways that Americans were feeling before the tariff announcements last week. And even if this pain were confined to equity markets—which it’s not—the possibility of a financial crisis could cascade that pain to everyone’s front door, as we saw in 2008.

Let’s set the scene of what the economy looked like on Liberation Day Eve. Inflation was rising at a rate close to expectations, but slightly hotter if you took out volatile food and energy prices. The threat of tariffs was likely moving the prices of durable goods higher, and even lower prices on eggs, which have plummeted on a wholesale basis (thanks mostly to—guess what!—imports), had not yet reached consumers.

SNIP
The result of all this is that even before Liberation Day, respected analysts like the UCLA Anderson forecast had pronounced themselves on “recession watch.” Yardeni Research raised the chances of recession to 45 percent on March 31. Worries about stagflation—a combination of higher unemployment and higher inflation—were rampant. The Organisation for Economic Co-operation and Development and the Federal Reserve both slashed their global and national growth forecasts, respectively, in March. Some of this was in anticipation of the tariffs, but then the tariffs Trump issued were far greater than expected.
https://prospect.org/economy/2025-04-09-economic-consequences-tariff-war/