On March 4, 2025 at 12:01 am, Donald Trump began the biggest trade war of modern US history. He imposed tariffs on Mexican, Canadian and Chinese imports, and doubled duties on Chinese products to 20%.
Tariffs against China have not been reduced, but some tariffs were eased on Canada and Mexico.
Reactions have been gloomy. The US consumer confidence has plummeted, the GDP estimate was revised down and markets have fallen.
Since a long time, economists are sounding alarms. The trade war is likely to cause an economic slowdown, increasing the chances of recession.
The country has become more divided than ever. Many theories have emerged regarding Trump’s final plan.
Some say that this all is part of an overall strategy to shape the US economy by deliberately causing short-term pain.
Is this possible?
Trade war is the biggest in over 100 years
Trump has promoted tariffs for years as a way to encourage a domestic industrial revolution.
The new tariffs are far higher than those of the 2018-2019 period and surpass even the Smoot-Hawley Act of 1929, widely credited with deepening Great Depression.
Estimates suggest that imports worth $1.3 trillion could be affected. This is equivalent to 42% of the total US goods traded.
The Administration is deliberately dismantling the global supply chains on which American industry has relied for decades.
Tariffs also increase the cost of inputs for manufacturers. This makes cars, electronic equipment, industrial equipment and food even more expensive.
Experts in the auto industry have warned of a price increase for new vehicles that will be at least $12,000
Tax Foundation estimates that US household tariffs could cost an extra $1,072 per year in 2025.
Trade deficits are surging. The trade deficit grew by 25% in January as companies rushed to buy goods before the tariffs went into effect.
The front loading of economic data distorts the real picture, causing temporary spikes in demand that are soon to reverse and further dampen growth.
As trading partners respond, the situation escalates rapidly. Canada has imposed massive counter tariffs and threatened to limit nickel exports. Nickel is an important input for US manufacturing.
China imposed tariffs of $22 billion on US agricultural products, such as soybeans, pork, and wheat.
Mexico promises countermeasures that will likely target US agricultural and industrial exports.
Trump threatens to impose 25% on EU auto imports. This will further escalate tensions.
This retaliatory measure will reduce US exports, but it also erodes business confidence. The result is a slowdown in investment, a decline in corporate profits and an increase of unemployment.
Uncertainty is a big no-no for markets and consumers
The financial markets react to this instability. S&P 500 lost its gains post-election, and there is an increase in volatility across asset classes.
The economic impact of Trump’s policy changes is difficult to estimate, particularly as Trump makes last-minute adjustments that create uncertainty in regards to the business environment.
S&P 500 dropped 6% in the last month. NASDAQ fell 8%. The Atlanta Fed lowered its GDP projection for Q1 from 3.9% to -2.8%.
Federal Reserve faces a dilemma in its policy. The Fed may be forced to maintain high interest rates by tariff-driven inflation, while a slowing economic climate could require it to ease monetary policy.
Rates that are too high or low could worsen the economic downturn.
The uncertainty has already slowed down business investments, as factory orders have shrunk and corporate budget plans are being cut back.
According to recent data released by the Institute for Supply Management, US factory activity is stagnant with both new orders and jobs contracting.
Tariffs disrupting supply chains cause businesses to increase input costs faster than they are able to pass on the cost increases. This further squeezes profit margins.
Many businesses are waiting to see if the trade policies and interest rates will be clarified before they decide on their expansion plans.
In the meantime, federal jobs are being drastically cut by the government. In just a few short weeks, over 250,000 federal employees have lost their job.
This is about 10% of federal employees. Trump’s approach to economics is based on a reduction of the government’s involvement in the economy.
This slowdown is it planned?
Trump claims that his tariffs “Will Make America Rich Again,” however, many economists claim that the Trump administration deliberately engineer an economic slowdown in order to reshape US economy.
This approach has many reasons, but one of the most important is timing. The administration can try to recover from a 2025-2026 recession before the election in 2028, giving Republicans the opportunity to take credit for the turnaround.
The Federal Reserve could be forced to lower interest rates by a downturn, which would benefit real estate, private equity and industries with high debt levels that rely on low-cost borrowing. The younger voters may be able to relate.
The administration’s economic nationalalism is more important than market efficiency, even if it does not have a strategy electoral.
Trump wants to force US firms to move production back to the US by breaking down global supply chains, making imports from abroad prohibitively costly and reducing their productivity.
Trump’s philosophy of economics is similar to autarky tactics from the Cold War era, such as North Korea’s Juche doctrine on self-reliance and protectionism.
Even at the expense of immediate wealth, it seems that economic independence is the goal.
What are the risks?
Short-term, increasing consumer prices, uncertainty in the business world, and a decline in investment may stall growth.
Tariffs are already increasing the cost of essential products, while corporations delay expansion due to unpredictability in policy.
The possibility of a full-scale war in the trade is still very real, as Canada, Mexico and China are all planning retaliatory actions.
The markets are reacting in a negative way, as well. S&P 500 is down 6%, NASDAQ is down 8% and Atlanta Fed has lowered its GDP Q1 forecast to -2.8% from 3.9%.
The consequences of trade disruptions could be more serious if they continue beyond 2026.
The US dollar’s dominance in financial markets could be weakened as major economies seek alternatives to settle trade disputes, resulting in a decline of global confidence.
Reshoring could lead to a deindustrialization of the economy rather than a revival.
Tariffs that drive inflation but do not improve domestic production could lead to a long period of stagnation in the US and higher costs.
There are three possible outcomes. The worst-case scenario is that spiraling costs, and breakdowns in trade, could send the economy into deep recession. This would be similar to the stagflation crises of the 1970s.
The middle ground could be a turbulence-filled scenario, with some gradual changes to prevent a complete collapse.
A historical precedent makes it difficult to predict the best-case scenario, where forced reshoring would revitalize domestic production.
The US has been locked into a risky economic experiment that is not clear in its outcome. At the moment, failure comes at a high price.
This article ‘Trumpcession: the real reasons for Trump’s Trade War and What Comes Next’ appeared first on ICD
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