Could Trump’s Tariffs Cause a Worldwide Recession?

U.S. President Donald Trump’s sweeping April 2025 tariff measures sent shockwaves through financial markets while upending decades of carefully built trade relationships worldwide, marking the most significant U.S. trade policy shift in at least a century. Economic experts immediately warned that raising the average effective U.S. tariff rates from just under 1.0% to between about 22.5% and 24%, the highest since 1910, could be catastrophic for an economy that was among the few to show significant growth coming out of the pandemic.

Since “the tariff increases were significantly larger than expected,” U.S. Federal Reserve Chair Jerome Powell said in a speech two days after their announcement, “the same is likely to be true of the economic effects, which will include higher inflation and slower growth.” George Pearkes, a macro analyst at Bespoke Investment Group, and Justin Wolfers, professor of public policy and economics at the University of Michigan, both told Investopedia the size of the tariffs significantly increased the likelihood of a recession, with JPMorgan forecasters raising their risk of a global recession to 60%.

Tariffs and the Potential for a Recession

The rationale economists give is based on several mutually reinforcing outcomes they view as likely:

1. Direct consumer impact: “These tariffs are going to hurt. A lot,” Wolfers wrote in a piece for the New York Times, adding that “they are going to reshape your life in much more fundamental ways”—more akin to a “crash” than a “jolt”—compared with those from the first Trump administration. The tariffs are expected to raise consumer prices by 2.3% in 2025, an average loss of about $3,800 per U.S. household, with the proportional effects growing worse for those lower on the income scale. Higher costs will come, too, from knock-on effects beyond the price tags for foreign goods. For example, “higher prices for auto parts will raise insurance costs,” Wolfers pointed out to Investopedia.
2. Business investment and supply chain disruptions: Half of U.S. imports are production inputs, meaning tariffs directly increase manufacturing costs for American companies that need them to make finished products. On the heels of the April tariff changes, many analysts projected it would decrease real gross domestic product (GDP) growth by about 0.9% in 2025, with exports projected to fall 18.1%.
3. Global retaliation: Trading partners are sure to counter with their own tariffs, causing blowback for the world’s economy: the World Trade Organization warns of a potential 1% contraction in global trade volumes.
4. Problems facing any U.S. Federal Reserve response: Specific sectors are expected to see major price increases (see the table on this page), potentially creating a combination of rising inflation and economic contraction called stagflation—something that the U.S. Federal Reserve would find difficult to address since its primary tool, interest rates, can’t address both prices and growth at the same time.

If the tariffs do lead to an economic contraction, how you prepare depends on your circumstances:

Long-term investors: “Your focus right now should be structured by your time frame. For anyone in the long term—10-plus years, like retirement accounts—today’s headlines don’t matter,” Pearkes said. “Don’t try and time the market, you won’t be successful.”

Short-term investors: “For shorter-term investors, it’s hard to see a positive catalyst in the near term,” Pearkes said. “The better entries to step in and buy are likely going to come later.” In other words, those with shorter time horizons might consider maintaining higher cash positions until the markets stabilize.

Consumers: With projected price increases of 2.3% across the board and significantly higher in categories like apparel (17%) and food (2.8%), households should consider doing the following:

• Review your budget to account for higher prices on imported goods.
• Consider accelerating major purchases in categories facing steep tariffs before they arrive, then switching to delaying, if you can, those purchases once they are in force.
• Build emergency savings.

The Bottom Line

“Few propositions command as much consensus among professional economists as that [free] world trade increases economic growth and raises living standards,” noted Harvard economist Greg Mankiw has written. Economists now worry the April 2025 U.S. tariffs could trigger a recession. With global markets in turmoil and businesses beginning to implement layoffs, the question is how severe and widespread the pain will be. “No one wins a trade war,” Wolfers said.