Trump overplays his hand as US flashes full recession alert
The American economy will be hit hard, but it’s beyond delusional to think anyone will be spared from the upending of global trade. Ambrose Evans-Pritchard
Apr 4, 2025 – 10.01am
So much for the buying opportunity. Every indicator on the equity, bond, commodity, and currency exchanges is flashing a full recession alert.
Donald Trump thought markets would beat his victims into submission. Instead, they have turned on him as it becomes clear that the US has vastly overplayed its hand and now faces furious retaliation from an angry world. It is America that risks spiralling into a deep economic crisis.
The assorted tariffs against “predators, scavengers, and rapists” on Trump’s Rose Garden list together erect the highest trade barrier since 1909, when America was still a semi-autarkic economy trading chiefly within its own borders.
The Yale Budget Lab says they push the effective tariff rate to 22.5 per cent, amounting to an immediate tax rise of well over $US700 billion ($1.1 trillion) on US consumers and firms.
This is a contractionary macroeconomic shock of 2.3 per cent of GDP, even before taking into account reprisals, and ignoring the carnage in the industrial supply chain.
1970s stagflation looms
The damage is worse than the Smoot-Hawley fiasco in 1930. The sudden jump in tariffs may look similar (plus 20 percentage points now versus plus 14 points then), but the US trade gearing today is five times higher. Nobel trade economist Paul Krugman calls it the greatest trade shock in world history.
It comes at a time when the Atlanta Fed’s instant tracker of GDP growth has already collapsed to minus 3.7 per cent. Confidence has crashed by every measure, and 1970s Nixonian stagflation is on the way.
Whose brilliant idea was it to impose a 25 per cent tariff on aluminium when the US depends on Canada for half its supply, and needs years to rebuild its own smelters?
The Fed’s monetary hands are tied by inflation. Unless Congress offsets this macro-squeeze with giant tax cuts the US will slide rapidly into a recessionary spiral, and once this starts spreading through credit markets the process is hard to stop.
Those analysts who told us airily that Trump’s tariff talk was just bluster now tell us that the tariff rates will be negotiated back down soon as targeted countries pay their ransoms. Well, perhaps.
Trump’s executive order does indeed state that the rates might be reduced should any trading partner take “significant steps” to remedy the alleged abuse and to “align sufficiently with the US on economic and national security matters”.
But Trump has also stated vehemently that he will pile more pressure on any country that dares to retaliate, as much of the world clearly intends to do. We must therefore assume that the tariff war will get worse, above all for America.
He also continues to insist that his “beautiful” tariffs will generate $US6 trillion of revenue over 10 years, which means that they will be permanent.
The Budget Lab says he will collect just half that level once the “dynamic” effects of lower growth and economic damage are factored in.
The US economy will be 0.6 per cent smaller in the long run and households will be $US3800 poorer.
China’s chance
Needless to say, such modelling cannot capture the force of emotion and political anthropology in world affairs. How to “score” what Trump is doing to the European and Asian security systems?
He has thrown Japan, Korea, and Vietnam into the delighted arms of China’s Xi Jinping. Nobody believes a single word uttered by US Defence Secretary Pete Hegseth as he tours the region promising “credible deterrence”. They can see what that looks like in Ukraine.
Trump has hurled invectives at Taiwan. He has accused it of industrial theft and has now imposed tariffs of 32 per cent, though wisely exempted semiconductors.
Should we be surprised if the Taiwanese people yield to a Chinese blockade, which may happen sooner than we all think? The US may then find that China scoops up the chip factories of the Taiwan Semiconductor Manufacturing Company, securing half the world’s EUV lithography scanners and 90 per cent of its advanced semiconductor capability without a shot being fired. Kiss goodbye to US tech supremacy then.
The White House is right in one sense about global imbalances. Asia saves and invests too much. It consumes too little. China produces 31 per cent of the world’s manufactured goods but absorbs only 13 per cent. The rest floods the global market.
Europe is also guilty of free-riding. The fiscal and tax structure of the eurozone has led to a chronic surplus in goods trade. The White House says consumption is 68 per cent of GDP in the US, 39 per cent in China, 49 per cent in Korea, and 50 per cent in Germany.
Does the fault lie with the world, or does it lie with US hedonism and a structural budget deficit above 6.4 per cent of GDP? Both are guilty.
Twenty countries have free trade agreements (FTAs) with the US. That made no difference when Trump attacked: 25 per cent for Korea; 24 per cent for Japan (partial trade deal). He has brutalised Canada and Mexico even though they are part of the North American pact (USMCA) that he negotiated himself. Nothing he signs is worth the paper it is written on.
In Britain, Sir Keir Starmer is condemned to stay calm and keep pushing for a UK-US trade deal.
But have no illusions even if he succeeds: any deal will be hostage to wild mood swings in the White House, weaponised at a later date to force the MAGA agenda upon us or to yield to the cultural nihilism of America’s tech brotherhood.
