Additional tariffs against China went into effect February 4. Additionally, Tariffs have been announced for steel and aluminum. Those are scheduled to go into effect March 12. There may or may not be a 25% tariff imposed upon Canada and Mexico (our second and third largest trading partners respectively after Europe). It is no wonder there is consternation and uncertainty in terms of the general state of the economy and concerning supply chains and pricing.
ITR’s macroeconomic perspective is that the tariffs are not going to tip the US into recession. The numbers do not indicate that a recession is a reasonable expectation. Trade is simply not that large a percentage of US GDP comparatively, and the US economy is the largest on the planet. The US trade deficit in goods amounted to 3.1% of US GDP in 2024. The US is 26.3% of global GDP. By comparison, China is 16.8% of the global economy. Size matters, especially when trade is a smaller slice of the US economy versus China, Canada, Mexico, and others.
The hope behind tariffs is that they will curtail imports more than retributions by other countries will curtail our exports or potentially lead to a negotiating position where the US can “force” additional exports into other countries. Considered in a vacuum, this would seem to be a plus for US GDP. However, prices will tend to rise for both domestically produced and imported products. Rising prices add to inflation, and rising inflation adds pressure for higher interest rates. It is also inevitable that some industries/companies will be net winners because of the tariffs, while others will be losers because of supply chain disruption and/or pricing. The net result is that the US economy will continue to grow, but uncertainty, pricing, and resulting interest rate pressures tend to be a drag on how fast the economy will grow.
We deem it unlikely that a rapid increase in the flow of foreign direct investment into the US will result from these tariffs. A lot of capital has already been spent in Mexico and elsewhere as part of “nearshoring” or supply chain resiliency; it is doubtful that companies can simply decide to replicate that effort in a short period of time. Furthermore, US rules and regulations may be easing, but hurdles remain (e.g., how much smelting and titanium mining, etc., do we really want to do in the US?).
While a “trade war” will not stop the US economy from growing, imposing punitive tariffs on Canada and Mexico could tip them into recession. Mexico’s economy is already weakening. Hurting the economy of these important trading partners will hurt our ability to increase exports to them and potentially create unintended consequences regarding the economic relationships.
China has built out a manufacturing base to support a growing China as well as the rest of the world. Now that China is confronted with a highly leveraged economy and a diminishing population base, it is going to struggle to grow and maintain its current economic relevance relative to the US’ prospects. The same is happening for much of Western Europe (UK and France being two notable exceptions).
One of the benefits of trade, even when the playing field is uneven, is that it creates an economic interest in the other country/countries, which provides a financial incentive for peace.
There are longer-term aspects to the nationalism behind these tariffs that are consistent with ITR Economics’ forecast of the 2030s Great Depression. Stay tuned. I will tackle those aspects next month at the ITR Economics Summit on March 20.