How Effectively Can the U.S. Economy Untether From China?
The outlook for U.S. growth and inflation hinges on the ability of U.S. supply chains to pivot out of China fairly quickly, a process that won’t be seamless.
U.S. trade policy has evolved significantly in a matter of weeks. Most recently, many observers are interpreting the Trump administration’s ongoing changes to tariff policy, including delays, negotiations, and exemptions, as potentially tempering the overall disruption to the U.S. economy. Consistent with this sentiment, U.S. equity markets have recovered somewhat after their initial reaction to the 2 April announcements. The S&P Index, for example, was down roughly 9% as of 15 April, after having lost as much as 15% year to date in the days immediately after the 2 April tariff announcement.
Over the past couple of weeks, the Trump administration shifted from an initial set of high and broad tariffs on most trade partners to a more moderate universal 10% tariff coupled with a significant focus on China, which currently faces a 145% tariff rate on most products.
Even after the latest tariff changes, we believe the chances of a U.S. recession remain elevated – close to a coin flip – and hinge on the ability of U.S. supply chains to pivot out of China to other sources of production fairly quickly, a process that won’t be seamless.
Latest developments on tariffs
In the days following the Trump administration’s 2 April announcement of broad universal and reciprocal tariffs, there have been several carve-outs for specific products and a 90-day delay in implementing reciprocal tariffs. The net result of these changes left U.S. tariffs more heavily focused on China, which currently faces a 145% tariff rate on most products. Elsewhere, the U.S. has a 10% universal tariff on all imported goods from other countries, with separate tariffs on Canada, Mexico, and a range of products, with more product-focused tariffs likely to come.
While there is no guarantee that the current tariff approach will last through or beyond the 90-day reprieve, some form of the current policy will likely remain in place. Amid the evolving details, the administration has been steadfast in its ultimate goals: opening up markets for U.S. exports, eliminating unfair trade practices in other countries, and reducing, even eliminating, reliance on Chinese production.
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