7 hours Ago
Tariffs Slashed, But Risks Remain
The agreement between the US and China involves a significant drop in tariffs, lowering them from previously overwhelming levels. US tariffs on Chinese goods, which had surged to 145%, will now be reduced to 30% for 90 days. China will similarly reduce its tariffs. This breakthrough has sparked a strong response on Wall Street and raised hopes that economic damage can be limited.
Despite this positive development, experts warn that the situation is still fragile. Tariffs remain much higher than they have been in decades, and overall uncertainty continues to hurt confidence and global trade. According to Moody's Analytics, the US effective tariff rate has decreased from 21.3% to 13.7%, which is still the highest since 1910. These tariffs are expected to push inflation up by more than one percentage point over the next year and reduce GDP growth by the same margin.
Douglas Holtz-Eakin noted that while it appears Trump has reversed course, high tariffs are still acting as a heavy tax on the economy. Erica York emphasized that the shift signals the administration understood how damaging the 145% tariffs could have been. Many feared they would lead to empty shelves and supply chain chaos, especially around the holiday season.
Recession Odds Lower, but Far from Gone
The trade agreement has led to a downward revision in recession forecasts, though risks remain. Economist Mark Zandi now puts the chance of a recession at 45%, down from 60%, saying the economy will likely struggle but avoid a full downturn. However, he warned that the economy is more vulnerable than ever to other shocks.
Justin Wolfers pointed out that while the outlook is better today than before the agreement, it is still worse than it was at the start of Trump's presidency. Earlier, he predicted a 75% chance of recession if tariffs remained at full strength. Following the tariff cut, he now sees the risk closer to 50/50.
Kathy Bostjancic expects slight economic growth this year, adjusting her previous prediction of zero growth. She also anticipates inflation reaching 3.4%, which is better than the earlier estimate of 4% before the tariff reduction.
Trump, when asked whether tariffs would return to 145% if no deal is reached after 90 days, said they wouldn't—but hinted they could rise significantly. He added, "I think you will have a deal, however."
More Tariffs Could Be on the Horizon
While the agreement has de-escalated the immediate trade war, it does not signal an end. Sector-specific tariffs still pose a threat. These could include new import taxes on aerospace products, lumber, pharmaceuticals, semiconductors, trucks, copper, and critical minerals. A national security probe into airplane and jet engine imports may lead to further trade restrictions.
Economist Joe Brusuelas still estimates a 55% chance of a US recession in the next year, citing unresolved sector tariffs as a major concern. He stressed that although economic separation between the US and China was avoided, uncertainty remains too high to ignore.
Deutsche Bank economists echoed this cautiously optimistic view, noting that while global growth prospects are improving and American trade policy appears more measured, the future remains unpredictable.
The level of trade policy uncertainty, as measured by tracking terms in national discourse, had reached record highs in recent months. The sudden policy reversal adds to this volatility. Wolfers described this as "paralyzingly high" uncertainty, noting that while the current development is encouraging, the business world remains unsure of what could happen next.
In summary, although the recent tariff reduction offers temporary relief, the broader trade conflict continues to loom over the US economy, with potential for future disruption still on the table.
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