Trade war risks add uncertainty to the economic outlook. While tariffs are usually considered inflationary, threats of tariffs appear to be recessionary and deflationary. After all, tariffs usually send prices higher, adding to inflation. However, threats of tariffs can spark fears that weigh on business and consumer confidence in a way that could negatively impact consumption, business investment, and economic growth, weighing on prices. How these dynamics play out in the months ahead is uncertain. Boxing out China to bolster U.S. economic security and economic self-sufficiency appears to be the main priority of U.S. international trade and tariff policies. Moreover, that focus is unlikely to waver or wane under the Trump administration.
Trade War Overview
Tariff threats and trade policies are being weaponized to advance U.S. geopolitical conflict deterrence and economic statecraft, acting as the sword and shield of economic security to support U.S. self-sufficiency and undercut Chinese economic power.
As in Cold War One, the Cold War Two Realpolitik driving the Trump administration’s trade and tariff posturing is informed by a containment doctrine to mitigate the propensity for Chinese manufacturing and export goods to undercut U.S. and North American heavy industry. Part of this containment strategy is to stop Chinese company transshipments through Canada and Mexico from engaging in willful U.S. tariff evasion.
While U.S. pressure to advance this national security agenda with Canada and Mexico has resulted in tariff uncertainty and swift policy changes, the goals of the United States that form the backdrop of the recent, ongoing USMCA trade conflict are relatively transparent and straightforward. However, some things are easier said than done, which is why policy shifts and responses have been staccato and unpredictable at times.
Trade War Expectations
Given the targeted focus of Trump administration trade policies, the risk of a prolonged all-out trade war in North America is much less likely. However, with China firmly in the crosshairs of U.S. trade restrictions, the risks of a protracted all-out trade war between the United States and China are very high.
As a result of the Trump administration’s attempts to bolster U.S. economic security, trade war risks have risen, and consumer confidence has fallen, presenting downside risks to economic growth. Moreover, the trade war of Cold War Two could escalate and spill over into an eventual hot conflict.
While economic power and security are the main focal points of the conflict between the United States and China, history shows that trade wars can swiftly turn into armed conflicts. As a sign of rising risks, China responded last week to the increases in U.S. tariffs on Chinese goods by stating that “If war is what the United States wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight till the end.” Following this recent Chinese government statement, U.S. Secretary of Defense Pete Hegseth said, “Those who long for peace must prepare for war, [and]
that’s why we’re rebuilding our military. That’s why we’re establishing deterrence.”
Given these statements, the administration’s singular focus on China is unlikely to wane or waver, according to Prestige Economics, which produces Cold War Two® trademarked research on geopolitical risks presented to the economy, financial markets, energy, trade, technology, and supply chains.
Trade War Market and Economic Impacts
Business and consumer confidence are under pressure due to significant trade risks and tariff uncertainty, presenting downside risks to growth and the dollar as well as downside risks for equity, bond, and industrial commodity prices. If growth prospects weaken, the Fed would likely take action to ease monetary policy.
As of March 6, the Atlanta Fed’s GDPNow reflects a likely contraction in Q1 2025 gross domestic product of 2.4%. While the GDPNow forecast is negative, there are more downside risks if consumer confidence falls further.
The Fed is currently poised to cut interest rates, especially if inflation eases and job gains slow. And if tariff risks remain elevated, the Fed may need to cut rates significantly more than is currently priced into financial markets.
With the prospect of additional Fed interest rate cuts, the dollar would face more downside risks. Meanwhile, equity, bond, and industrial commodity prices would likely find support on lower interest rates.
What do you think of U.S. tariff and trade policies?
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