The Real Danger from Donald Trump’s Tariff Wars

Is the U.S. Economy Permanently Damaged Because of Donald Trump’s Tariffs? It’s a tumultuous time for everyone who deals with financial markets and those who are attempting to read the tea leaves of the broader economy.

President Donald Trump announces a tariff rate and then slashes it. The main stock markets indices have dived and then rallied, placing participants in a frenzy.

Everyone from Wall Street professionals to ordinary people invested in retirement accounts cannot decide where to head next for financial safe-harbors.

What happens next in the tariff wars? The real danger might come down to the uncertainty this has created.

Tariffs from Donald Trump: Lasting Economic Pain? Yes and No

But have Trump tariffs already done lasting damage to the economy?

That depends on who you ask. There are some doomsayers who believe that great harm has been done to the structure of the economy. These analysts who preach negativity think the unpredictable nature of the trade war, especially with China, creates an environment of uncertainty that hurts the ability of CEOs of large institutions and small business owners to plan for the future.

Others are of the opinion that this is only a temporary state with tariffs likely to be mitigated by Trump and other countries negotiating a positive outcome.

It’s Difficult to Keep Up with Tariff Events

Events are moving quickly.

The European Commission announced today the EU would place a 90 day pause on its tariffs of 25 percent that it was instigating against the United States.

Trump is still battling China and raised his tariff rate against XI Jinping’s country to 125 percent. Financial markets are struggling to absorb this news as stock market indices opened lower on April 10.

This Pain Will Be Felt Into the Future

The damage to the greater economy may have already been done despite Trump’s tariff respite on April 9. George Saravelos, global head of FX research at Deutsche Bank, said the following.

“Even if the tariffs are permanently suspended, damage has been done to the economy via a permanent sense of unpredictability in policy,” Saravelos explained. “More structurally, the events of the last few weeks will resonate amongst global economic partners during the upcoming negotiations on trade and indeed for many years to come. The desire to build greater strategic independence from the US across all fronts will be here to stay.”

The Damage Is Only Temporary

Alternatively, Jim Caron, chief investment officer of portfolio strategy at Morgan Stanley Investment Management, is less alarmist and feels that the markets and the economy will recover.

“We can heal from this,” he told CNBC’s “Squawk Box Europe” on Thursday. “It’s going to take a little bit of time and some confidence rebuilding.” Caron believes that Trump is just trying to negotiate and that the shock to certainty will abate.

The Economy Is Strong For Now

The broader economy looks healthy at the moment.

In March the country added 228,000 jobs which was better than expectations. The unemployment rate moved up to 4.2 percent. Anytime unemployment rates are in the lower 4 percent range, economists are usually not that concerned about the state of the job market.

Today inflation figures were released. Inflation went down a bit to 2.4 percent, which was lower than expected and better than the 2.8 percent inflation report in February. The 12-month inflation rate fell a seasonally adjusted 0.1 percent in March.

Donald Trump’s Recession?

Some economists have predicted that a recession could ensue that would combine negative GDP growth, worsening unemployment rates, and more inflation. So far, that has not been true. These pessimists believe that there could be a condition known as stagflation – recessionary conditions with stubborn high prices over a period of two quarters or more.

It is important to note that so far tariff rates can change at any time. These can be reversable with a stroke of Trump’s pen. He can raise them and lower them in a moment’s notice with a post on social media. This is indeed a scary and stressful time for business owners and some consumers are waiting on major purchases until they are more certain about the rise in prices from the tariffs.

It is also important to let the tariffs play out and to see each day what is going to happen before we judge what will become of the broader economy in the future. The critics may be too negative and the optimists too positive about the economy. There is a middle lane to travel on.

The China Challenge

The main problem now is the trade war with China. Xi Jinping does not seem to be intimidated. China is preparing for “prolonged economic warfare” with the United States. China could be looking to sell its goods to countries other than America.

This would hurt the U.S. consumers who depend on lower-priced items from China to make ends meet. Prices on Amazon, at Wal-Mart, and at Dollar General could go up, hurting lower income families.

Watching China’s actions in the coming days and weeks will be essential. This could affect inflation and financial markets. A drawn-out trade war with Beijing would be indeed damaging to the economy. However, Trump has proven that he is nimble in his decision-making and aware of people’s concerns about financial markets and their pocketbooks. Xi Jinping has appeared to have dug in, though, and that could bring more uncertainty and negative economic sentiment that would increase inflation and the unemployment rate.

About the Author: Dr. Brent M. Eastwood

Brent M. Eastwood, PhD is the author of Don’t Turn Your Back On the World: a Conservative Foreign Policy and Humans, Machines, and Data: Future Trends in Warfare plus two other books. Brent was the founder and CEO of a tech firm that predicted world events using artificial intelligence. He served as a legislative fellow for U.S. Senator Tim Scott and advised the senator on defense and foreign policy issues. He has taught at American University, George Washington University, and George Mason University. Brent is a former U.S. Army Infantry officer. He can be followed on X @BMEastwood.