In Depth: Trump’s Trade Wars Put America at the Heart of the Coming Economic Storm
By Zeng Jia from Washington D.C., Wang Jing and Han Wei from Beijing
Two months into Donald Trump’s presidency, the promised economic lift from his policies has yet to take hold. Instead, U.S. stocks have tumbled amid mounting concerns over the administration’s unpredictable agenda and fears of a slowdown in the world’s largest economy.
Since Inauguration Day, the S&P 500 has dropped 10.5% from its peak, while the tech-heavy Nasdaq Composite has fallen 14.3%. Though markets steadied somewhat by late March, lingering policy uncertainty continues to drag on both the economy and investor sentiment.
Working-class Americans, in particular, are growing anxious. Tariffs are pushing prices higher, and many worry wages won’t keep pace. This pessimism is showing up in consumer confidence data. The University of Michigan’s index fell to 57.9 in March, down 11% from February and 27% year-on-year. Meanwhile, the U.S. Chamber of Commerce’s consumer expectations index hit a 12-year low of 65.1 — a reading below 80 often signals a risk of recession.
Businesses are feeling the strain, too. The U.S. Purchasing Managers’ Index (PMI) slipped back into contraction last month, as Trump’s trade policies saw the price of materials rise.
Most economists aren’t sounding the alarm just yet. While confidence is softening, there hasn’t been a meaningful jump in unemployment or jobless claims, Brian Coulton, Fitch Ratings’ chief economist, said in an interview. He added that a tight labor market should support consumer spending in the near term, though clearer signs of economic damage could emerge by late 2025.
Even with potential tax cuts on the horizon, the long-term impact of Trump’s economic agenda remains unclear. For now, the numbers don’t point to an outright recession — but the warning signs of a slowdown are hard to ignore.
Recession shadow
In January, the U.S. trade deficit, including both goods and services, increased to $131.4 billion, a 34% month-on-month increase, according to the U.S. Census Bureau. The widening gap dealt a blow to GDP growth, prompting the Atlanta Fed’s GDPNow model to slash its forecast for the first quarter from 3.9% growth to a 2.4% contraction.
Yet Jan Hatzius, Goldman Sachs’ chief economist, argued that the headline figures overstate the damage. “While we do expect GDP growth to slow this year, and policy uncertainty poses some additional downside risk, the latest data points are not as bad as they look,” he wrote in a research note.
Much of the recent deficit spike stems from surging gold imports, he added, which don’t factor into GDP calculations since the metal typically isn’t used in production or consumption. He also attributed weak consumer spending in January to temporary factors such as severe winter weather and seasonal adjustments.
Investors’ flight to safety has turbocharged the demand for gold. According to data from the Bureau of Economic Analysis, U.S. imports of goods saw a significant increase in January, rising by $36.2 billion, with $20.5 billion of that from industrial metals. While Trump has not imposed new tariffs on precious metals, analysts say the rush reflects preemptive hedging against trade policy risks.
The gold boom has inadvertently distorted trade data, exacerbating the very economic weaknesses Trump promised to fix. Fitch’s Coulton predicted that U.S. growth will halve to 1.5% in coming years from its recent 3% pace. Still, he said Washington appears willing to endure short-term pain, indicating that policies won’t soften despite market turbulence.
“The economy has got to go through a difficult period, but we will come out stronger at the end of it. That’s the message that they seem to be touting,” said Coulton.
With fiscal options narrowing amid spending cuts and immigration crackdowns, analysts say tax reductions may be Trump’s last lever to spur growth. But Standard Chartered’s chief strategist Eric Robertsen warned that their impact is uncertain. The administration can’t accept a recession, but tariff wars and layoffs leave little room to maneuver.
All-out trade war
The biggest socioeconomic impact of Trump’s economic policy comes through tariffs. This differs from his first term, where the initial round of tariffs, while attention-grabbing, had a far less significant effect than the current measures.
As of now, the United States has imposed a 20% tariff on Chinese goods, a 25% tariff on certain Canadian and Mexican products, a 10% tariff on Canadian energy and a 25% tariff on steel and aluminum.
On March 26, Trump signed an executive order levying a 25% tariff on imported vehicles and specific parts, with vehicle tariffs set to take effect on April 3, and tariffs on parts by May 3. More reciprocal tariffs are expected to be announced.
Experts warn that these tariffs are contributing to a global trade war, with retaliatory measures already taken by America’s trading partners, including Canada, China and the European Union. Coulton said that the U.S. is driving the largest tariff increase since 1929, which is likely to lead to a negative growth shock in countries heavily reliant on trade with the U.S., such as Mexico, Canada, Vietnam and China.
According to the Tax Foundation, the average U.S. tariff rates are expected to jump from 2.5% in 2024 to 8.4% by 2025, marking the highest level since 1946.
Despite Trump’s push to bring manufacturing jobs back to the U.S. through higher tariffs, experts argue the strategy is flawed. Tariffs are raising costs for U.S. businesses, especially in capital goods and intermediate products, ultimately undermining the attempt to revitalize domestic manufacturing, said Coulton.
Former Bank of Japan Governor Masaaki Shirakawa warned that while the tariffs may temporarily curb inflation, they will have a more damaging effect on global economic growth in the long term. The OECD predicted that global growth would slow from 3.2% in 2024 to 3.1% in 2025, with the U.S. economy experiencing a similar decline from 2.8% to 2.2%.
Global responses
The uncertainty surrounding U.S. economic policies, especially tariffs, is pushing the global economy toward a more fragmented and stagflation-prone future. Policymakers worldwide now face a crucial question: Is the U.S. retreat from its traditional global leadership role temporary, or must countries rapidly adapt to a new trade reality? How far should governments and businesses go to restructure global value chains?
While the U.S. remains the world’s largest importer, it is no longer the center of global trade. In 2017, when Trump took office, the U.S. accounted for 13% of global imports and 9% of global exports, meaning more than 80% of global trade occurs outside U.S. borders. In the past decade, with the exception of technology and fossil fuels, America’s influence in global trade has been steadily declining.
The U.S. government’s decreasing reliance on trade may make it more inclined to use tariffs and other trade tools to force negotiations with its partners.
Global responses to Trump’s tariffs have been varied. The EU, China, and Canada have retaliated with their own tariffs, while Japan and India have sought to appease Trump by increasing investments in the U.S. and improving market access for American companies. Meanwhile, Vietnam has agreed to buy more Boeing aircraft but has also stressed its continued cooperation with China, opting for a balanced approach to mitigate risks.
As tariffs continue to mount, the costs of maintaining access to the U.S. market may soon outweigh the benefits for trading partners. This could lead countries to reduce their dependence on the U.S. and diversify trade relationships. Economists warned that Trump’s tariff strategy relies heavily on the dollar’s status as the world’s primary reserve currency, but this approach risks diminishing U.S. global influence as the country’s political capital erodes.
Research shows that the steel and aluminum tariffs imposed during Trump’s first term led to heightened trade policy uncertainty, resulting in a $40 billion annual drop in U.S. foreign direct investment. With the new round of tariffs, investors are increasingly hesitant to commit capital to the U.S., given the unpredictability of tariffs on specific goods and countries.
Economists estimate that if major export-driven economies such as Germany and Japan were to halt exports to the U.S. overnight, their GDPs could suffer losses of 3% to 4%. While this shock would be difficult, it is not insurmountable. A gradual reduction in reliance on the U.S. market would make such an adjustment easier to absorb, and abandoning the U.S. market would not pose an existential threat to these economies.
Warwick Powell, an expert on the Chinese economy at Queensland University of Technology, suggested that the BRICS countries — the group of leading emerging economies — could offset the loss of the U.S. market within four years. To capitalize on the potential for expanded trade among other nations, Powell pressed for more free trade agreements, greater market access and a unified response to counter Trump’s unilateral polices, which he sees as a threat to the multilateral trading system.
Li Yi contributed to the story
Contact reporter Han Wei (weihan@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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