Why Tariffs Could Tip Us Into a Recession
Trade fuels prosperity. But today, global markets are on edge—not because of tariffs alone, but because no one knows what comes next.
When tariffs hit the headlines, they often sound like a bold move to protect jobs, revive industries, and put “America First.” But what if the real result is higher prices, lost jobs, and a slower economy?
Here’s the truth: tariffs are taxes. And like most taxes, someone ends up footing the bill – usually you.
Trade wars don’t just raise prices — they kill confidence.
Source: Reuters
A New Trade War, A Familiar Risk
In early 2025, the U.S. dramatically escalated tariffs on imports from key partners. The stated goal? Rebuild American industry and rebalance trade. The result? Rising fears of a tariff-induced recession.
Goldman Sachs now sees:
U.S. GDP growth slowing to just 0.5% in 2025
A 45% chance of recession in the next 12 months
Inflation climbing toward 3.5%, adding pressure on the Fed
Why This Time Is Different
Unlike previous trade spats, this shock is enormous in scale and speed:
The U.S. effective tariff rate is jumping from ~3% to over 25%
Trade now accounts for 3x more of the U.S. economy than in 1930
Policy swings are rapid and unpredictable, stalling investment decisions
As Nobel laureate Paul Krugman put it:
“It’s not the size of the shift, but the uncertainty around it that could cause a recession.”
Business Confidence Is Freezing
Companies don’t know where to build, hire, or sell. That’s dangerous.
Consumer sentiment is plummeting
Capital investment plans are shrinking
Markets are pricing in more downside risk than upside potential
When business leaders don’t know the rules, they don’t play the game. They sit on their hands—and growth stalls.
The Fed’s Dilemma
The Federal Reserve is caught between two fires:
Cut rates too fast, and you risk fueling inflation
Hold too tight, and you might deepen a recession
Goldman expects three modest rate cuts this year—but warns that a serious downturn could demand aggressive easing, possibly up to 200 basis points.
Three Perspectives, One Truth
Here’s what the experts say:
Krugman: A recession is likely. Reversals might worsen uncertainty.
Hatzius (Goldman): Tariffs are a tax on growth. The Fed has room to respond but might be late.
Oren Cass: Long-term reindustrialization is worth short-term pain—if executed with clarity.
As an investor, I lean toward the Krugman-Hatzius view: uncertainty kills investment. And I’ve learned that when companies don’t know the rules of the game, they sit on the sidelines. That’s bad for growth.
Lessons from History: We’ve Seen This Before
History is full of warnings:
Latin America’s protectionism led to decades of stagnation
Brexit, billed as a win for sovereignty, became an own goal—slashing the UK’s GDP, weakening its global influence.
The parallels to today’s tariff push are uncomfortably clear.
A Glimmer of Hope: The UK’s Nimble Role
Interestingly, the UK could be a stabilizing force:
Post-Brexit flexibility lets it adapt fast
It can deepen trade ties with Asia, Japan, and South Korea
By aligning with EU values while partnering with the U.S., it could bridge geopolitical divides
But the stakes are high:
Worst-case global scenario = $1.4 trillion in welfare losses
UK exports to U.S. could drop 44%
The Investor Takeaway: Buy When It Hurts
When uncertainty reigns, opportunity hides in plain sight. Here’s how I’m thinking:
Use sell-offs to buy high-quality companies on sale: Great companies often get unfairly punished in broad sell-offs.
Be patient, but be ready: Wait for mispricings. Value ahead of time.
Diversify globally: Some regions may benefit from trade realignments.
As I’ve said before: When the time comes to buy, you won’t want to. That’s when you should.