Why tariffs are recessionary (the transmission channels)

More expensive → intransigent inflation → tighter money
Tariffs are import taxes, so they generally raise input and consumption prices. If inflation re-accelerates, central banks might keep rates up for longer, cooling investment and high-ticket spending. IMF research connects tariff shocks and policy uncertainty with reduced output, exactly through these channels.

Capex and hiring freeze due to uncertainty
When companies can’t forecast future tariff levels or access to markets, they slow the opening of factories, hiring, and R&D. The IMF cautioned that a prolonged rise in tariffs and uncertainty can sharply dampen global growth—not only through increased costs, but because managers hold back on the sidelines

Supply-chain jams and re-routing expenses

The 2018–19 U.S.–China episode did not only compress bilateral trade but diverted it, with expensive rewiring of value chains in Asia. That diversion is costly and takes time, which depresses productivity and margins. WTO analysis records substantial trade diversion and recurring high bilateral tariff levels even after “Phase One.

Confidence shock to markets and consumers

Markets discount future profits when world trade volumes totter. Consumers facing price surges and gloomy headlines might rein back discretionary expenditures—precisely the type of demand shock that has the potential to transform a slowdown into a slump. Leading forecasts (OECD/IMF) have identified tariff escalation as a primary source of downside risk to already tepid world growth.

What recent evidence tells us

2018–19 US-China trade war: Studies identify significant growth expenses, with tariffs landing mostly on US consumers and importers; IMF analysis points to U.S. GDP’s negative contribution from tariff shocks in 2018–19. The WTO reported steep bilateral trade drops and expensive diversion.

Today’s baseline is ailing: The OECD’s June 2025 forecast puts world growth at ~2.9% in 2025–26, basing that on the assumption existing tariffs remain—in place, not rising. That means the threshold to fall into recession in some parts isn’t high in the event of a tariff shock.

History’s blaring warning siren: The Smoot–Hawley Tariff Act was accompanied by a trade collapse on the scale of ~65% during 1929-1934, as nations retaliated—a notorious demonstration of how protectionist spirals may intensify slumps. Contemporary economists habitually invoke it as an example of a policy mistake not to be emulated.

When does a tariff war go recession-grade?

Imagine a three-ingredient recipe for disaster:

Scale: Across-the-board hikes (not just narrow sectors) among multiple large economies—especially if they hit consumer staples, intermediate inputs, and capital goods simultaneously.

Speed: Rapid implementation gives firms and consumers no time to adjust; inventories drain and price spikes bite before supply chains can re-route.

Staying power + revenge: If tariffs appear to be long-lasting and prompt tit-for-tat, uncertainty becomes endemic; capex, employment, and trade levels shrink in sync. IMF and OECD projections invariably signal that this combination is what converts a growth headwind into a threat of recession.

Who gets hurt—and how

Households: Shell out more for imported products (and locally made products with imported components). Poor households are hit worst because necessity items command a larger portion of their budget. Data from the 2018–19 episode indicate that consumers paid a large share of the bill.

Manufacturers & SMEs: Endure higher costs of inputs and order uncertainty; small firms exporting struggle to make the transition to alternative markets or reengineer supply chains.

Commodity & logistics players: Fluctuating volumes and re-routing can whipsaw shipping rates and port activity—well for some lanes, painful for others.

Emerging markets in supply chains: Nations connected to East Asian or North American value chains might have trade diversion produce winners and losers—some gain from “friendshoring”, some lose as assembly lines relocate.
World Trade Organization

Would the world be able to prevent a recession even with increased tariffs?

Perhaps—buffers count:

Targeted, temporary, and open measures are less harmful than across-the-board increases.

Countervailing macro policy (e.g., fiscal relief, clearer monetary direction) can counteract some drag if inflation permits. Recent IMF projections observe that improved financial conditions and policy assistance can buffer trade shocks.

Resilient supply chains can diversify quicker today than in the past, dampening the effect—but not removing it. WTO evidence indicates diversion does occur, but at a cost.

However, if large economies ramp up widely and maintain high tariffs, the chances of synchronized slowdown materialize.

Upcoming watchlist (applied dashboard)

Policy announcements → actual legislated text: Are suggested tariffs broad or narrow? Definitive or temporary?

Business investment & PMIs: Sudden declines in new orders and capex tend to presage output declines.

Global trade flows (services and goods): WTO/IMF reports on trade expansion—particularly if they downgrade fast following policy shocks.

Inflation or rate path: If inflation that is tariff-caused maintains policy rates elevated, the risk for growth increases.

Scorecard of retaliation: After tit-for-tat sets in, uncertainty compounds.

Bottom line

Tariffs are an appropriate tool for targeted, short-term purposes (e.g., anti-dumping, national security). But wide, quick, and persistent tariff wars by giants are a guaranteed method for draining global expansion—and, if coupled with stuck inflation and lost confidence, could induce a world recession. History’s lesson and current modeling both aim in the same direction: the larger and the more prolonged the tariff spiral, the greater the recession probability.
Encyclopedia Britannica