Storm clouds gather over US economy as Trump kicks off trade war

WASHINGTON, March 4 (Reuters) - A U.S. economy praised for its surprising resilience to a pandemic, high inflation, and rapid interest rate hikes faces a new challenge from President Donald Trump's self-declared trade war, seen by economists as a recipe for fewer jobs, slower growth, and higher prices.

The fallout, assuming Trump does not backtrack in the face of falling stock markets and cracks to consumer and business sentiment, is expected to be broad, deep and time-consuming as the world's largest economy adjusts to the overnight shock of a 25% tariff on most goods coming from Mexico and Canada, both close trading partners and geographic neighbors, and an additional 10% duty on imports from China. Canada and China have announced retaliatory tariffs on U.S. imports, while Mexico is expected to do so this coming weekend.

A price shock on its face, the tariffs could also begin to kill demand, said Diane Swonk, chief economist at KPMG, particularly if consumers retreat and firms facing heightened uncertainty curb investment and hiring. The move also risks unintended consequences - if, for example, banks tighten credit on small businesses instead of extending suddenly expensive customs bonds.

A recession by the start of next year is not out of the question, Swonk said, with some analysts expecting a downturn could sweep the continent given the dependence of Canada and Mexico on exports to the U.S. market. Retaliation could further deepen the impact.

"We've got now multiple trade wars on multiple fronts," Swonk said. Her analysis shows the effective tariff rate spread across roughly $3 trillion in U.S. imports might rocket to 16% by early 2026 from a current baseline of about 3% if Trump follows through on all his threats. "That would be the highest rate since 1936," during the Great Depression, and "gets you flirting with stagflation" - the toxic m...
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