As Washington’s tariff wars are escalating, the stakes are increasingly global. Now red lights also blink over the US economic outlook.
Barely 2 weeks ago, US economy seemed resilient, but that was then. Although Trump tariffs have barely taken off, several indicators are now raising red flags.
The Atlanta Fed’s GDP tracker indicates US economy is headed for a 1.5% contraction in the first quarter, despite 2.3% growth days earlier. That’s a sharp reversal from the fourth quarter, when GDP expanded by 2.3%.
Red lights over US economic prospects
New data suggests that in January US consumer spending fell for the first time in almost two years, while the goods trade deficit widened to a record high. As Reuters reported, “businesses front-loaded imports to avoid tariffs, setting up the economy for weak growth or even a contraction this quarter.”
Typically, the Atlanta Fed attributed the sudden change to fresh data on the US trade deficit, which drags on growth, and weaker consumer spending.
Not everything can be attributed to the cold weather that has been penalizing US demand. The Trump disruption has a key role externally (hyper-assertive trade policies that have barely started, coupled with aggressive geopolitics particularly in the Americas) and internally (efforts to dramatically reduce federal spending and downside workforce).
Combine dimming global prospects with demand destruction at home, amplified by the DOGE cuts of Elon Musk, and the outcome is predictable.
New data is further reflecting the negative turn. Add to the mix the rising jobless claims, record-low home sales, regional banks’ deteriorating outlook, sinking consumer indicators, falling capital spending and climbing fears of tariff-driven inflation, and most ingredients for a perceived or real cost-of-living crisis are emerging.
A fleeting shock is unlikely when there is much more ahead. The White House has barely started its trade crusade against the world, and as targeted countries are now initiating their first retaliations, several new rounds of higher US tariffs and greater tit-for-tat reprisals will follow.
Tariffs as economic coercion
On February 1, President Trump imposed 25% tariffs and 10% duties on energy products on Canada and Mexico, and 10% tariffs on China. These countries are America’s greatest trade partners and the US has a trade deficit with each. The tripartite tariffs alone would cost an average US household over $1,200 a year.
Starting with the heated US exchanges with Colombia, the White House used US economic muscle hoping to push Canadian Prime Minister Justin Trudeau and Mexico’s President Claudia Sheinbaum into a US-controlled North American bloc against China.
After talks, levies against Canada and Mexico were delayed for 30 days; that is, until March 1. Last Thursday, President Donald Trump said his proposed 25% tariffs on Mexican and Canadian goods will take effect on Tuesday, along with an extra 10% duty on Chinese.
The proposed tariffs on Canada and Mexico would reduce long-run GDP by 0.3%, the imposed tariffs on China by 0.1%, and the proposed expansion of steel and aluminum tariffs by less than 0.05%, by some estimates. But as foreign retaliations kick in, including those by Canada and Mexico, so will these numbers worsen again.
A trade war between the US and its two largest trading partners will further penalize US income, hurt employment and accelerate inflation.
As Trump’s tariffs went into effect against China, Beijing announced a broad package of economic measures on February 10 targeting the US and more is about to follow. “If the U.S. insists on its own way,” China’s Ministry of Commerce responded, “China will take all necessary countermeasures to defend its legitimate rights and interests,”
The likely multi-trillion-dollar costs of unwarranted tariffs
Half a decade ago, Trump tariffs on imports from China accounted for $396 billion or more than 90% of the trade affected. Yet, the first round of the Trump tariffs with Canada, Mexico and China alone would cover far more trade in dollar value.
Trump’s four tranches of tariffs on Chinese goods in 2018-19 covered imports valued at $360 billion at the time. Today Canada and Mexico and China supply more than two-fifths of all US imports. New tariffs on the two countries plus additional tariffs on China could cover imports valued at over $1.3 trillion in 2023. That’s over 3.5 times more than half a decade ago.
It is just the opening salvo in a series of US tariff moves anticipated in the coming weeks.
Meanwhile, US tariff threats are shifting from steel and aluminum to computer chips and pharmaceuticals, the European Union and Japan; even the world. The US also has a major trade deficit with multiple trading economies, including Germany, South Korea and Vietnam, which are likely to be next in the firing line.
“Reciprocal tariffs” going far beyond tariffs
What will further compound economic uncertainty and market volatility are Trump’s reciprocal tariffs of trade destruction. The White House has tasked its economic team with devising plans for “reciprocal tariffs” on every country taxing US imports.
Starting with countries with the biggest trade surpluses and highest tariff rates first, the Trump administration’s first aim is to offset not just tariffs but also non-tariff measures, including vehicle safety rules (a shrewd way to impose American vehicle insecurity worldwide). The same goes for value-added taxes (VAT), even though VATs are faced by both US and other international companies in different countries.
Additionally, the Trump administration is going for what it deems as “burdensome” regulations, harmful “government subsidies” and flawed exchange rate policies. In the view of most countries, such actions impose on the world US-style deregulation, privatization and dollar manipulation.
The threatened coming waves of new tariffs will worsen trade tensions, lower investment, hit market pricing, distort trade flows, disrupt supply chains and undermine consumer confidence. And since tariff is a tax levied on imported goods and services, the Trump administration may be setting a stage to vicious circles of global stagflation.
We are in for a far costlier, global déjà vu all over again.
This update also draws from Dr Steinbock’s commentaries published by TRT World on Feb 12, China Daily on February 20, China-US Focus on Feb 21.
About the Author
Dr. Dan Steinbock is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net/
