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In a striking assessment of the economic landscape, US President Donald Trump's trade policies are being scrutinized for potentially pushing the economy toward a recession. This concern arises not solely from the imposition of tariffs but primarily from the unpredictability surrounding these trade measures. Economist Paul Krugman articulated this viewpoint during a recent episode of the Goldman Sachs Exchanges podcast, where he described Trump's new tariffs as the "biggest trade shock in history."

Krugman, who is recognized globally for his contributions to economics and has been awarded the Nobel Prize, explained that while tariffs typically do not trigger recessions, it is the unstable nature of these tariffs that poses a significant threat. He stated, "A stable tariff rate would not cause a recession, but an unpredictable tariff rate that can change the next day has a really depressing effect on demand." This unpredictability can create a climate of uncertainty that stifles economic growth.

When tariffs are imposed on foreign goods, the intended effect is to encourage consumers to purchase domestic products instead, which can lead to a preference for local goods over imports. While this shift can have some advantages, Krugman noted that it could also result in a higher cost of living and reduced efficiency in the market. He emphasized that tariffs alone do not typically lead to a drastic drop in consumer demand, but the unpredictable nature of Trump's tariffs adds a layer of complication.

Krugman highlighted that the uncertainty surrounding these tariffs serves as a significant barrier for businesses, complicating their investment decisions. Companies find themselves caught in a precarious situation, unsure of how trade policies may change overnight. This uncertainty doesn't only affect businesses; it can trickle down to consumers, influencing their perception and morale, which is critical in maintaining robust demand levels. As Krugman warned, "If consumer spending falls off a cliff, then it can lead to a severe recession." This remark underscores the potential ripple effects that could occur if consumer confidence wanes.

These comments come in the wake of volatile market fluctuations as investors and traders navigate the complexities introduced by the Trump administration's evolving trade policies. Recent discussions have seen Trump hinting at the possibility of reducing the current 145% tariff rate imposed on Chinese imports, stating, "145% is very high, and it won't be that high." He added, "It'll come down substantially, but it won't be zero," indicating a potential shift in strategy.

In response to these tariffs, China has retaliated with its own 125% tariff on imports from the United States, intensifying the trade standoff between the two economic powerhouses. Treasury Secretary Scott Bessent commented on this situation, declaring that the existing tariff levels between the nations are unsustainable. However, he clarified that the US would not be making any unilateral cuts to these tariffs.

The uncertainty around trade policies has already prompted several companies, including Alaska Airlines, Southwest Airlines, and the recruitment firm PageGroup, to begin withdrawing or withholding their financial guidance for the current year, a move that reflects the cautious approach many businesses are adopting in light of the unpredictable economic climate.