New York
CNN
—
President Donald Trump marched the US economy to the brink of a self-inflicted recession and a potential supply chain meltdown.
But at the last moment, Trump decided to pull back.
The US-China breakthrough unveiled Monday calls for a 90-day thaw in the trade war by slashing tariffs from suffocatingly high levels as trade was paralyzed between the world’s two biggest economies.
The dramatic drop in US-China tariffs is an undeniable positive compared to just a few days ago. The breakthrough has already set off an epic party on Wall Street and is raising hopes that a tariff-driven nightmare can be avoided.
Yet economists say it’s still too early to declare the US economy is out of danger altogether. Recession risks remain, even if the odds of a downturn have been dialed back a notch.
Tariffs are still very high — much higher than at any point in decades. Uncertainty is even higher. Damage to confidence and trade flows won’t be undone overnight.
Moreover, there is no playbook for what happens next. There is no precedent for how a modern economy responds after going through this many shocks in this short a time.
“We are far from out of the woods,” said Douglas Holtz-Eakin, president of the American Action Forum and a former economic adviser to Republicans. “There is a narrative that Trump did a U-turn. He didn’t. We still have tariffs at levels we haven’t seen in a century. That’s a substantial tax increase.”
At 145%, US tariffs on China were unsustainably high, amounting to an effective embargo on trade. Supply chain experts warned of imminent trouble, including empty store shelves.
“This staves off the really disastrous consequences that were about to hit the US economy,” Erica York, vice president of federal tax policy at the Tax Foundation, told CNN.
York added that Trump’s economic team backtracking from the 145% tariff rates “shows the administration realizes what a disaster it would have been.”
Even though Trump has repeatedly offered a dose of tough medicine in recent weeks, including questioning how many dolls kids need to own, he has been sensitive to the image of barren store shelves as well as financial market reaction to a deepening trade war, a senior administration official told CNN’s Jeff Zeleny.
“Both sides luckily decided to save Christmas,” Peter Boockvar, chief investment officer at Bleakley Financial Group, wrote in a report on Monday. “The US side listened to the existential crisis of many small businesses.”
Still, despite Trump’s decision to slash tariffs on China to 30% for at least 90 days, import taxes remain sharply higher than at the start of the year.
Based on the trade framework agreements reached with China and the UK, Moody’s Analytics calculates the US effective tariff rate has dropped from 21.3% to 13.7%. That’s still the highest level since 1910.
At that level, tariffs are set to add more than one percentage point to US inflation through this time next year and erase the same amount from gross domestic product (GDP), Mark Zandi, chief economist at Moody’s Analytics, told CNN.
As a result of the US-China trade war thaw, Zandi is cutting his recession forecast — but not dramatically. He now sees a 45% chance of a US recession this year, down from a peak of 60%.
“The economy will have a tough year but should avoid a recession,” Zandi said in an email. “Of course, the economy will be highly vulnerable to anything else that might go wrong.”
In other words, the trade war has eroded the margin for error in this economy.
Justin Wolfers, an economics professor at the University of Michigan, noted on X that it’s true that US trade policy and the prospects for the economy are “much better today than they were yesterday.” But it’s also true, Wolfers said, to say that the situation is “much worse today than on Inauguration Day.”
Such is the speed and turbulence of the Trump 2.0 agenda.
After Trump spiked tariffs at his April 2 “Liberation Day” event, Wolfers warned the odds of a recession would reach 75% if all the tariffs kicked in and stayed in place.
Now Wolfers tells CNN that the risk of a recession has fallen sharply but still remains a coin-flip at roughly 50/50.
“There has been a wholly unnecessary supply chain disruption. You can’t undo that. It will take some time to work itself out,” Wolfers said in a phone interview.
Nationwide chief economist Kathy Bostjancic now sees the US economy eking out slightly positive growth this year, up from her prior call for no growth at all. Nationwide still sees inflation accelerating to 3.4% this year, but that’s an improvement from 4% before the US-China breakthrough.
Trump himself acknowledged on Monday that tariffs could still slingshot higher on China.
Asked if tariffs would go back to 145% if no deal is reached at the end of the 90 days, Trump said: “No, but they’d go substantially higher.” He added: “I think you will have a deal, however.”
In other words, the US-China trade war is not over, even if it got dramatically less bad.
And tariffs are not being suddenly removed from the president’s tool chest.
Sector-specific tariffs still loom, including potentially on lumber, semiconductors, pharmaceuticals, copper, critical minerals and trucks.
Just last week the Commerce Department set the stage for potential aerospace tariffs by launching a national security probe into imports of airplanes, jet engines and parts.
The risk of further tariffs ahead is one reason RSM chief economist Joe Brusuelas is sticking to his forecast of a 55% chance of a recession over the next 12 months.
“While the agreement prevented an economic decoupling, and that is significant, there are still too many details to be determined, especially those sector tariffs, to remove a recession risk from the table,” Brusuelas said.
Deutsche Bank economists expressed relief on Monday about the easing trade war.
“The global growth outlook is improving,” Deutsche Bank economists wrote in a report. “American trade policy has turned more conciliatory and there is now a better defined range of tariff outcomes. The peak of the trade war uncertainty is in.”
Of course, uncertainty had almost nowhere to go but down.
Trade policy uncertainty, as measured by an index that mentions the topic in major US newspapers, had skyrocketed in recent months to off-the-chart levels unseen since tracking began in the 1960s.
The sudden reduction in US and China tariffs will ease financial pressure on the business community but only adds to the sense of whiplash. And it remains to be seen exactly how businesses will respond to levels of uncertainty that Wolfers described as “paralyzingly high.”
“It’s absolutely a manufactured crisis,” said Holtz-Eakin, who served as an economic adviser to Sen. John McCain during the 2008 presidential campaign.
Wolfers said investors and the business world are still bracing for the next shoe to drop when it comes to tariff policy out of the Trump White House.
“What are the chances that we have 90 days of calm ahead of us?” Wolfers said. “Today we have good news, but what would really be good news is if someone just took the button away from him.”
