Tariffs and recession risks: the impact of Trump’s Trade War

Agne Linge, WeFi’s head of growth, writes a guest blog.

The crypto industry has celebrated a pro-crypto shift within the US regulatory environment over the last few weeks. The optimism is well founded – the US president has his own meme coin, the SEC has already vowed to lower crypto enforcements, and earlier last month, White House released its crypto executive order to establish regulatory clarity.

Under Trump’s term, the Securities Exchange Commission has also implemented SAB 122 — which is said to pave the way for crypto adoption. There’s also a strong push towards a Bitcoin reserve – not just in the US but globally.

Despite this optimism the past week made it clear that crypto has become more susceptible to macroeconomic factors. Coinglass data shows that the crypto market dropped $2 billion on the day when President Trump announced tariffs for China, Canada, Mexico.

Some experts indicate that original liquidations exceeded $10 billion – far worse than the liquidations during the FTX fallout. Factors such as “Sell the news, buy the rumour” could have been at work for the cryptomarket.

Trump has agreed that tariffs on Canada and Mexico will be delayed by one month. If these tariffs are implemented, they may increase the risk for a recession because they will reduce consumer spending and increase economic uncertainty.

Tariffs and Economic Contraction

Tariffs are a form of taxation on imported goods. The purpose of tariffs is to protect the domestic industry by making imported products more expensive. This protectionism is not without cost. Tariffs can increase the price of goods and cause consumers to cut back on their spending.

The U.S. economy is driven by consumer spending, which accounts for 68% of GDP. Any sustained decline in consumption could push the overall economic activity under the threshold required to avoid a depression.

The employment situation on both sides would also be severely affected. The 25% tariffs could result in an estimated 0.25% loss of jobs in the US. Canada and Mexico are expected to lose up to 3 percent of their workforce.

According to me, these tariffs may have severe ripple effects. Deutsche Bank analysts have also argued that sustained tariffs against Canada and Mexico—two of the United States’ largest trading partners—will be “far larger in economic magnitude” than the repercussions of Brexit on the United Kingdom.

It is not overstated to say that Canada and Mexico may be thrown into recession if 25% tariffs are implemented. This is because of the importance of the U.S. consumer and their sensitivity to changes in trade volumes.

The Trade War Escalation, and its Broader Impact

Many stakeholders expected that these actions would harm international trade flows and increase production costs. They also predicted that prices would rise across the board. While domestic and foreign companies scrambled to adjust their supply chains, uncertainty associated with such policy shifts could further dampen economic activity.

The crypto markets experienced volatility last week as a result of these policies. Trump agreed with Canada and Mexico to postpone tariffs by one month. Bitcoin’s price rose from $92,000 to more than $100,000.

The relief, however, was short-lived, as China responded with its own tariffs. Within hours, the price of the cryptocurrency dropped to $96,000. This dynamic shows how sensitive the markets are to news about tariffs.

Inflation risks and the Federal Reserve dilemma

Federal Reserve officials expressed concern about the inflationary effects of tariffs on a large scale. Although they haven’t explicitly tied these policies to upcoming monetary decisions, their warnings are important.

Austan Goolsbee of the Chicago Fed spoke out earlier about a variety of threats to supply chains relating to tariffs. Tariffs drive up import costs. When these costs get passed on to the consumer, inflation increases.

This is a worrying scenario, as inflation can reduce consumer spending and exacerbate recessionary conditions. The Fed faces a serious dilemma.

The central bank tries to tighten monetary policy in order to reduce inflation.

A too aggressive interest rate policy could, however, compound the negative effects caused by tariffs.

Gold remains the primary asset to be stored in safe-havens

While digital assets, such as Bitcoin, have struggled to remain stable amid increasing trade tensions and uncertainty in the market place, traditional safe-havens like gold have seen a renewed demand. Gold reached a record high according to The Kobeissi Letter.

Gold prices are rising because investors seek shelter from the increased market volatility and inflationary forces. This shift is a simple one. Investors are wary about the future of the economy as tariffs increase consumer prices and undermine trade.

With the risk of recession and the possibility of further monetary tightening, gold’s relative stability makes it an attractive asset.

Looking Forward

The next few weeks will be decisive. If the U.S. persists in its aggressive policy of tariff imposition, without making meaningful trade concessions we could see increased inflation and market volatility.

At the same, we could predict the beginning of a recession in important partner economies. Policymakers—and investors alike—must recognize that the costs of trade protectionism extend far beyond the immediate sphere of international commerce.

Ultimately, while some may argue that these tariffs could eventually force a renegotiation of trade terms, the evidence suggests that the risk of recession—and the attendant damage to consumer confidence and global liquidity—is too great to ignore.