Even as growth ramps up to what could be the fastest rate since before the financial crisis, economists are worried that a trade war could tip the U.S. into a significant slowdown or even a recession.
Specifically, the worry is that the duties could spark a larger global trade war that triggers inflation and kills U.S. growth just as it appears to be accelerating out of its post-crisis malaise.
"Our calculations suggest that a major trade war would lead to a significant reduction in growth," Michelle Meyer, U.S. economist at Bank of America Merrill Lynch, said in a note. "A decline in confidence and supply chain disruptions could amplify the trade shock, leading to an outright recession. We continue to believe that the probability of a full blown trade war is low but the risks are rising and it remains a key uncertainty to our outlook."
On the same day Meyer and her team released the report, Trump amped up the rhetoric another notch by threatening to hit European auto imports with a 20 percent tariff unless the EU relents on duties it imposes on American vehicles.
That threat comes on top of a presidential directive to the U.S. trade representative to find another $200 billion of Chinese goods for tariffs following a previous list of $50 billion worth. China has vowed that it will match the U.S. tariffs dollar for dollar.
Economists view the actual damage as limited in dollar terms, since the total proposed tariffs are only a small part of the total trade between the U.S. and its partners and the overall size of the domestic economy.
However, the concern is that the current parrying continues into a perpetual round of threats and retaliations that wrecks consumer and business confidence — both of which are around record highs — and provides a cost shock that could tip the economy into at least a brief recession.