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US President Donald Trump’s trade policies could contribute to a recession, not because of the tariffs themselves, but because of their unpredictability.
“A stable tariff rate would not cause a recession, but an unpredictable tariff rate that can change the next day is really a depressing effect on demand,” the economist Paul Krugman said on an episode of the Goldman Sachs Exchanges podcast uploaded on Wednesday. He called Trump’s new trade tariffs the “biggest trade shock in history.”
The Nobel Prize-winning economist said tariffs don’t usually cause recessions. Levying tariffs on foreign products means that people will buy fewer imports and more domestic goods. This could have “unpleasant consequences” such as higher cost of living and lower efficiency, he said.
However, tariffs alone do not generally cause a collapse in demand.
The issue with Trump’s tariffs is that they are “extremely uncertain,” Krugman said. “Nobody knows what they will be. Nobody knows what comes next.”
For businesses, that uncertainty is a stumbling block to investment decision-making, he said.
The sentiment could also flow through to consumer perception and morale, ultimately hitting that segment of demand too, he said.
“If consumer spending falls off a cliff, then it can become a severe recession,” he said.
Krugman’s comments follow weeks of market swings as investors and traders grapple with the Trump administration’s new tariffs on trade partners and shifting positions on policies.
This week, Trump suggested that he could reduce the 145% tariff rate he has imposed on Chinese imports this year. On Tuesday, he told reporters that “145% is very high, and it won’t be that high.”
“It’ll come down substantially, but it won’t be zero,” he said.
China has imposed a 125% tariff on US imports.
Treasury Secretary Scott Bessent said on Wednesday that the current tariff levels between the two countries are unsustainable, but that the US wouldn’t be cutting them unilaterally.
Some companies — including Alaska Air, Southwest Airlines, and recruitment firm PageGroup — have started withdrawing or withholding guidance for this year.
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