Americans breathed a sigh of relief Monday morning as the United States and China, the world’s largest global economies, agreed to remove most of the tariffs against each other while negotiations continue. The stock market soared and consumers put a few items back in their shopping carts.
The New York Times reported that the United States and China said they would suspend their respective tariffs for 90 days while they determine the best path forward. Trump agreed to reduce the tariff on Chinese imports to 30 percent from its current 145 percent, while China says it will lower its import duty on American goods to 10 percent from 125 percent.
But tariffs remain in place: 30 percent for China and 10 percent for other countries, leading a Houston economist to predict that the likelihood of a recession is reduced but not eliminated.
President Donald Trump’s punishing “Liberation Day” tariffs went into effect last month, exacerbating concerns about a self-inflicted recession, slowing economic growth, fueling inflation and creating product shortages.
Prior to Monday’s announcement, the likelihood of a recession was about 60 percent, according to J.P. Morgan Research.
“Since taking office, President Trump has announced a growing list of tariffs on specific countries and commodities — a move aimed at protecting American interests,” J.P. Morgan Research posted on May 2. “While the rollout was initially marred by delays and reversals, the latest announcements have ignited an international response, sending markets tumbling and increasing the risk of a global recession.”
But what about now? By Monday morning, J.P. Morgan officials said the market was already dictating a lower, 35 percent, probability of recession. and substantial progress on trade talks.
Dietrich Vollrath, an economics professor at the University of Houston, says the risk of a recession is mildly lower but probably not “significantly lower.”
“This pause to negotiate is better than the situation was last week,” he said. “However, it remains the case that tariffs on China and other countries are all substantially higher than they were in January, which has already led to significant drops in shipments and production both here and in China and elsewhere.”
“Once you’ve turned off a bunch of activity, you can’t just flip a switch to turn it back on, in large part because this deal remains temporary and arbitrary. It’s subject to an administration changing its mind at any time,” Vollrath continued. “Uncertainty is the enemy of economic growth, and this doesn’t really solve the issue with uncertainty.”
The risk of recession would be significantly lower if Congress rescinds Trump’s ability to make emergency tariff changes “and takes back control of the process,” Vollrath said.
“That would slow it down and ensure that any agreements made are binding, like all our existing free trade agreements, NAFTA, et cetera, which provides certainty,” he said. “Until that happens, the risk of investing in the U.S. remains so high that a recession remains a strong possibility.”
