The Longer Tariff Uncertainty Lingers, The More It Corrodes The Economy

Consumers and business leaders don’t know what President Donald Trump is going to do next when it comes to tariffs, and the longer that goes on, the more it could damage the economy.

That’s according to economists at Oxford Economics, who analyzed the effect of policy uncertainty on business investment. The uncertainty over the final outcome of Trump’s on-again, off-again tariff announcements is on track to drag down U.S. business investment by 4% this year, Michael Saunders, senior advisor, and Daniel Harenberg, lead economist at Oxford, wrote in a commentary Tuesday.

Investment could quickly rebound next year if the uncertainty settles down, but could fall by as much as 14% if uncertainty stays high through Trump’s entire four-year term of office, they wrote.

The research highlights one of the major ways Trump’s threats to impose tariffs on trading partners could impact the economy, regardless of what policies end up actually going into effect. Trump has kept business leaders, consumers, and foreign countries guessing in recent weeks, several times announcing tariffs weeks in advance, only to delay them or modify them at the last minute. A new round of tariffs is set to go into effect starting April 2.

Economists have warned of many negative effects of tariffs, including higher prices for consumers, higher risks of inflation, potential job losses and the possibility of a recession. The Trump administration has argued tariffs will encourage businesses to relocate factories to the U.S., raise revenue for the government to replace income taxes, and help negotiate to get other countries to lower their own trade barriers.

The Only Thing We Have To Be Uncertain Of, Is Uncertainty Itself

When companies are thinking about how much to spend on equipment, buildings, research, and other projects to increase their productive capacity, they’re long-term decisions, said Jadrian Wooten, a professor of economics at Virginia Tech. Uncertain policy on trade can make betting on the future risky.

“If they don’t know what’s going to happen, you hold back, you wait,” Wooten said. “And that sort of hesitation—whether it’s for businesses making investment decisions, households making consumption decisions—if enough of those people start doing it, that’s where you get into recession stages.”

For example, the long-term plans of auto manufacturers were thrown into confusion last month when Trump announced 25% tariffs on products from Mexico and Canada. Companies like GM, Stellantis, Ford, and Toyota have factories in all three North American countries, and completed vehicles incorporate parts that cross the borders multiple times.

Shortly after imposing the new tariff, Trump exempted most cars from the import taxes until April 2. An analysis by S&P earlier this month predicted the turmoil would continue through 2025, and put “industry planning in a virtual gridlock.”

Uncertainty about government policy has such a big effect on the economy that researchers have developed ways to measure exactly how much of it there is at any given time. The Baker, Bloom, Davis U.S. Trade Policy Uncertainty Index calculates how many times certain words appear in major U.S. newspapers. In February, the index shot up to its highest ever in data going back to 1985.

Wooten recalls two other times when things felt as uncertain as they do now: in 2008 after the collapse of Lehman Brothers and in 2020 after the onset of the pandemic. Both times, the economy was sent into a recession.

However, uncertainty alone is unlikely to send the U.S. economy into a recession, Wooten said. But it’s one of several factors that have caused some forecasters to increase their estimated chances of a recession ahead.

“It’s hard to fathom, but we are back on recession watch,” Mark Zandi, chief economist at Moody’s Analytics, posted on social media platform X Monday. “The odds of the economy unraveling into recession in the coming year are uncomfortably high, rising to 35%.”