President Trump’s trade war has become a harsh reality for investors and the economy. Despite frequent tariff threats during his campaign and after his election, many were uncertain how seriously to take these warnings until recently. “They’re believing him more now,” said Neil Dutta, head of U.S. economic research at Renaissance Macro Research. Trump’s decision to impose tariffs is reshaping the U.S. economic outlook rapidly. While steady consumer spending and low unemployment provided some buffer against economic shocks, new tariffs combined with broader policy uncertainty and potential ripple effects from Elon Musk’s Department of Government Efficiency will impact growth. “People who would never even think about recession now suddenly have to consider it,” said Mohamed El-Erian, chief economic adviser at Allianz. Administration officials argue that tariffs are not a barrier to growth. Treasury Secretary Scott Bessent claimed tariffs would boost investment, improve national security, and increase government revenues. However, past tariffs during Trump’s first term led to reduced business investment and a contracting manufacturing sector, prompting Federal Reserve interest rate cuts in late 2019. According to Brad Setser of the Council on Foreign Relations, the new tariffs on Canada, Mexico, and China alone could reduce GDP growth by a percentage point. These tariffs could significantly affect consumer spending, the main driver of growth. Trump’s tariff wars are far from over, with further escalation expected in April, potentially threatening a recession. This situation poses a dilemma for Fed Chair Jerome Powell, who has maintained elevated borrowing costs to control inflation while supporting economic expansion. Renaissance Macro’s Dutta noted that Trump proceeded with tariffs despite market instability, suggesting a higher tolerance for financial pain than anticipated. — news from POLITICO
