Escalating Tariff War Could Trigger Recession

Trade and tariff wars could lead to recessions.

A tit-for-tat trade dispute is spreading through the world’s economy, increasing the likelihood of a global recession. Since US President Donald Trump asked China, Europe and other countries to renegotiate the terms of what he called unfair trade deals, countries have retaliated by imposing tariffs and quotas.

The escalation started with the US imposing steep tariffs on washing machines and solar panels in February this year, followed by tariffs of 25% on steel and 10% on aluminum.

In April, China responded by increasing tariffs by up to 25% on 128 products imported from the US, including frozen pork and wine.

Canada, the European Union, Mexico, India and Turkey followed suit, and the retaliatory measures appear far from over.

“The uncertainty over trade right now is one of the reasons that there is indeed a risk of recession,” says Christopher Rupkey, chief financial economist at MUFG Union Bank in New York.

The US imposed a tariff of 25% on $34 billion worth of goods, which took effect on July 6, followed by a second round of 25% tariffs on August 23. A third package of tariffs is under consideration.

President Trump also recently announced, via a tweet, a doubling of aluminum and steel duties for Turkey to 20% and 50%, respectively.

Meanwhile, China is considering imposing a 25% tariff on $16 billion worth of US goods covering more than 300 categories, ranging from food, fuel and steel products to automobiles and medical equipment. “It’s no accident that, during the Great Depression of the 1930s, one of the key elements was trade tariffs and sanctions,” says Rupkey. “Each nation started to protect their industries. If you don’t have countries trading with one another, you lose one of the engines of growth. I’m still very much in the camp that everyone benefits from trade.”