In an interview with CNBC-TV18, Eichengreen stated, “If the current stance of policy and Trump’s intransigence continue, the US will be in recession by the end of the year.” He also warned that the global economy would suffer as the US downturn spreads.
Eichengreen particularly criticised the recent tariffs imposed on Canada and Mexico, calling them an economic disaster that would raise costs, reduce efficiency, and harm US economic growth, especially due to the deep integration of North American supply chains. He also cautioned that ongoing inflationary pressures, exacerbated by tariffs and tax cuts, would continue to dampen economic activity.
Below are the edited excerpts:
Q: Can you start by telling us what may be the impact of these recent tariffs on the US economy itself?
Eichengreen: Tariffs on Canada and Mexico, which will elicit retaliation from the two countries, are a disaster in general and for the United States in particular.
The three members of what we used to call the North American Free Trade Area (NAFTA) are intimately connected and intertwined with one another. The famous figure is that parts and components of motor vehicles assembled in North America cross these internal borders six or more times before they’re completed. Interfering with that is going to raise costs, reduce efficiency, and harm economic growth in the United States and, by implication, economic growth globally.
Q: The Atlanta Fed GDP data and the February ISM manufacturing data are already pointing to a contraction of the US economy. Do you fear the US could go into a contraction for even longer, maybe a couple of quarters?
Eichengreen: The Atlanta Fed indicator is very noisy, very volatile, and not a precise or pinpoint indicator. But I think it’s getting the trend right that consumer confidence has been declining. Consumers are unhappy about inflation still, and it becomes harder to blame that on the Biden administration. They’re uncertain about the costs of maple syrup from Canada and avocados from Mexico. Consumer spending is softening, and consumer spending accounts for two-thirds of the US economy. The other third is investment, and firms don’t know what the investment environment is going to look like in a few weeks or months. We’re seeing inflation showing signs of accelerating because tariffs and tax cuts are both inflationary, and we’re seeing signs of the economy weakening.
The next thing that’s going to happen, of course, is that Trump will lash out at the Fed because the Fed should be doing something about this inflation problem and this weakening economy. And if Trump attacks the Fed, that will only further undermine investor confidence. I’m not hopeful.
Q: If stagflation indeed becomes a reality and the markets start reacting, won’t the President move away from these aggressive tariff policies?
Eichengreen: There has been quite a debate over the last few months about whether Trump’s tariff rhetoric is simply a negotiating device or if he really believes that tariffs are good for the US economy—the higher, the better. We’ve learned that he really believes in tariffs, and he’s not going to go back to freer trade because he learns that they’re not an effective negotiating tool. They only elicit retaliation. Similarly, he’s a true believer in tax cuts. And I think, having to choose between cutting taxes further and blowing up the deficit, he will opt for blowing up the deficit.
Q: Inflation is still nowhere near the Fed’s target of 2%. It’s a good 60 basis points higher. What’s your overall assessment of the US economy, both in terms of growth and inflation?
Eichengreen: I think the economy does not do well in the face of chaos, and Trump is a chaos machine. So, the odds of a recession are rising by the day. I would expect, if the current stance of policy and Trump’s current intransigence continue, that the US will be in recession by the end of the year, and the rest of the world will struggle as the US lapses into recession.
Q: What’s your take on the implications of tariffs on India? Will the reciprocal tariffs take place, or do you think even that could get diluted?
Eichengreen: I think they will happen. I think there are a few national leaders who’ve done a good job of getting on Trump’s right side—Keir Starmer of the UK and your Prime Minister Narendra Modi, partly because Trump so dislikes China, and India is a valuable counterweight in Asia to China. I think there is a scenario where India avoids significant US tariffs, but it cannot avoid a significant US recession. I think there are still very grave dangers for the Indian economy going forward.
Q: What do you think will be the impact of the tariffs on China itself? Do you think China may react by devaluing its currency? How else may it react? How will the economy pan out?
Eichengreen: As I understand it, today’s measure is an additional 10% tariff on China, above and beyond what was already there. Since there were earlier tariffs on China, Chinese policymakers have been able to plan and adjust—invest abroad in Asia, conduct assembly of Chinese products in other Asian economies, and begin to sell more to non-US markets. In all those ways they can limit the damage to the Chinese economy.
In addition, they can retaliate strategically by banning exports of rare earth to the United States. And that will encourage Trump to limit his tariff increases to 10% or whatever. I do not think they will significantly devalue their currency because that would damage financial stability in China and that would elicit more tariffs from Donald Trump.
They will have to do the best they can with the current exchange rates and current financial conditions.
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