The sweeping tariffs President Donald Trump announced Wednesday, combined with his other import levies, likely would plunge the nation and world into a deep recession if he follows through on the plan, economists say.
It’s likely, however that the White House will provide carveouts, exceptions and subsidies that would allow the U.S. to narrowly avoid a downturn but still bring the economy to a standstill, said Mark Zandi, chief economist of Moody’s Analytics.
The most far-reaching version of Trump’s strategy would raise the effective, or average, tariff on U.S. imports to about 20%, comparable to the heavy import duties the nation imposed in the 1930s and that contributed to the Great Depression, Zandi said. Before Trump took office, the average U.S. tariff rate was about 3%.
If the 20% average tariff is imposed and kept in place for more than a few months, and U.S. trading partners retaliate in kind, “the U.S. and global economies will not suffer a depression, but they will suffer serious recessions,” Zandi said.
Zandi said it’s more likely U.S. officials will agree to carveouts, exceptions and subsidies to American farmers, and some countries won’t retaliate or will do so mildly. In that case, he said, the effective tariff rate would rise to 15% and U.S. economy would stagnate but dodge a recession.
What is a recession?
A recession is informally considered at least two straight quarters of declining economic output. The technical definition, according to the nonprofit National Bureau of Economic Research, is “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
The measure is based on employment, income, consumer spending and industrial production, among other criteria.
What is the prediction for the US economy?
The new tariffs are expected to reignite inflation, hammering consumer spending, which makes up 70% of economic activity. The prospect of the new trade regime is also dampening business confidence and is likely to curtail hiring and investment, forecasters have said.
All else equal, the tariffs would drive the Federal Reserve’s preferred inflation measure from 2.8% to 4.8%, economist Sam Tombs at Pantheon Macroeconomics wrote in a note to clients. The annual inflation gauge reached a high of 5.6% in 2022 because of product shortages and other effects from the COVID-19 pandemic.
Is inflation going to get worse in 2025?
But Tombs said the ultimate impact on prices likely would be smaller – pushing inflation to about 4% – because retailers likely will absorb some of the costs and consumers will substitute goods made in the U.S. or in countries with lower tariffs. A rise in import prices also is expected to reduce imports, strengthening the dollar and making foreign goods cheaper for Americans. That would offset some of the impact from the tariffs themselves.
Trump on Wednesday announced a 10% tariff on all imports as well as additional reciprocal fees on the 60 countries that contribute most to the U.S. trade deficit. The fees, Trump said, are designed to respond to those countries’ import tariffs on U.S. goods as well as other non-tariff trade barriers such as value-added taxes, currency manipulation and foreign government subsidies to local manufacturers.
Trump said officials tallied those nations’ tariffs and their estimates of non-tariff barriers to come up with their tariff-equivalent rates. They then agreed to charge those nations a duty equal to half that total rate.
For shipments to the U.S. from the European Union, that means a 20% tariff; China, 34%; Japan, 24%; South Africa, 30%; and India, about 26%.
The new fees come on top of the 20% tariff Trump already has slapped on China; 25% fees on imported steel and aluminum; and 25% on some goods from Canada and Mexico not covered by a trade agreement. A 25% tariff on all imported cars and light trucks was set to take effect Wednesday.
Trump apparently won’t increase tariffs on products from Canada and Mexico that are covered by the trade deal, Zandi said, somewhat softening the impact of the duties overall.
This article originally appeared on USA TODAY: Trump’s sweeping tariffs could spell a US recession, high inflation