The figure below contains my favorite chart. I use it in all of my presentations on the economic outlook. It shows that in the 77 months after enactment of the North American Free Trade Agreement (NAFTA) in January 1994, industrial production in US manufacturing grew at a 6.0% annual rate, its fastest growth since the early 1960s. Employment in US manufacturing reversed a long-term decline and rose after NAFTA was enacted.

The chart on the next page suggests that NAFTA also put downward pressure on inflation. From January 1994 until March 2021, when the American Rescue Plan unleashed a surge in inflation, ‘core’ inflation, as measured by the year-over-year change in the Personal Consumption Expenditures price index, excluding food and energy, was above 2.6% in exactly one month (August 2006). Before NAFTA, core inflation had been below 2.6% in exactly one month in the previous 27 years (December 1993). President Trump has called NAFTA “the worst trade agreement in history.” The data say otherwise.

The NAFTA-induced period of strong growth in manufacturing ended in May 2000, when the US House of Representatives approved permanent normal trade relations for China, paving the way for China to join the World Trade Organization (WTO). Since then, industrial production in US manufacturing hardly has grown at all (0.1% annual rate), and employment in US manufacturing has declined by nearly five million jobs, despite growing slowly since 2010. The data suggest that the worst trade agreement in history was allowing China to join the WTO without enforcing the requirements for WTO membership.

Looking back to 2018

I used these two charts in my November 2018 newsletter, entitled, “Right War, Wrong Weapon.” In that newsletter, I pointed out that “while [President Trump] has been unfairly critical of NAFTA . . ., his criticism of Chinese trade practices has been largely correct and totally justified.” And while his words were wrongly aimed at NAFTA, his actions were correctly focused on China (“Right War”). Although he imposed tariffs on steel and aluminum, washing machines and softwood lumber, the tariffs he imposed on most imports from China were the main feature of his trade policy. Meanwhile, he negotiated the US-Mexico-Canada agreement (USMCA), which was similar enough to NAFTA that it could have been called NAFTA 2.0. Contrary to his words, President Trump’s actions indicated that he knew that Canada and Mexico weren’t the problem; China was the problem. I would have preferred targeted legal attacks on companies that stole the intellectual property of US companies over tariffs (“Wrong Weapon”), but I conceded that “tariffs are better than doing nothing to save US manufacturing.”

Reciprocal tariffs

President Trump is raising tariffs again and more aggressively than in his first term. The big news this month has been the announcement of so-called ‘reciprocal’ tariffs on April 2 and the 90-day suspension of most of these tariffs on April 9. These tariffs aren’t really reciprocal; they are not based on the tariffs imposed on US exports by our trading partners or on any explicit measure of non-tariff barriers. They are a back-of-the-envelope calculation of the tariffs that would be needed to eliminate bilateral trade deficits under simplistic assumptions about how much of the tariffs would be passed through to consumers and how much consumers would respond to higher import prices.

The ‘reciprocal’ tariffs announced April 2 were much larger than anyone expected and triggered a sharp decline in stock prices. When they started to trigger a big increase in bond yields and a big decline in the value of the dollar, President Trump, likely influenced by Treasury Secretary Scott Bessent, announced a ‘pause’ to allow time to negotiate ‘deals’ with America’s trade partners. But the President left in place a 10% ‘baseline’ tariff on most countries and a 145%(!) tariff on imports from China, which amounts to a de facto boycott of most (but not all) imports from China. (He since has reduced tariffs on all electronics, including smartphones and computers, to 20%, at least for now.) China retaliated with 125% tariffs on imports from the United States, noting explicitly that this amounted to a de facto boycott and that anything higher than that was a “joke.”

President Trump has expressed a desire to make a deal with President Xi, which means the 145% tariffs on imports from China could be short-lived. But a quick end to the game of chicken between Presidents Trump and Xi, plus deals to avoid the reimposition of ‘reciprocal’ tariffs, still would leave in place the 10% baseline tariffs and 25% tariffs on steel, aluminum, motor vehicles and parts, and imports from Canada and Mexico that are not “USMCA-compliant.” I think these tariffs are more than enough to cause a US recession, mostly through much higher prices and lower availability of motor vehicles. US light vehicle sales surged to a 17.8 million seasonally adjusted annual rate in March, the highest since April 2021, as buyers bought before tariffs were imposed. Sales likely are to remain strong in April and maybe in May, as buyers buy vehicles imported before tariffs were imposed. But sales are likely to plummet thereafter as dealers’ inventories are depleted and potential buyers suffer a bad case of sticker shock.

Industrial production up, inflation lower

The US economy was in good shape before the April 2 tariff announcement. Nonfarm payrolls grew by 228,000 in March. Retail sales surged 1.4% on ‘pre-buying.’ Industrial production in US manufacturing rose 0.3%. Inflation in March was lower than expected. The Consumer Price Index fell 0.1% vs. expectations of a 0.1% increase. Excluding food and energy prices, the CPI rose 0.1% vs. expectations of a 0.3% increase. The Producer Price index fell 0.4%, 0.1% excluding food and energy. The good news on inflation gives the Federal Reserve room to cut interest rates if the economy falls into a recession, which is what consumers seem to expect despite the good economic data for March. The University of Michigan’s Index of Consumer Sentiment fell to 50.8 in early April, its lowest reading since June 2022.

Reduced growth forecast

Tennis fans have called President Trump’s tariff policy an “unforced error.” Soccer fans have called it an “own goal.” Fans of crime and medical dramas have called it a “self-inflicted wound.” I liken it to holding a gun to your own head and saying to your trading partners, “Stop or I’ll shoot.” But the President has shown a willingness to adjust or delay tariffs in response to turmoil in financial markets, fears of recession and lobbying by tech-company CEOs.

The rollbacks and delays so far are enough to avert a global depression. They are not enough to avert a garden-variety recession, which now is my forecast for the remainder of 2025. To avert such a recession, President Trump would have to reduce tariffs on China and quickly eliminate the tariffs on Canada and Mexico, which I think are more harmful than the other tariffs. But even if a recession is averted, long-term damage has been done to the US economy.

The on-again, off-again nature of Trump’s tariffs has heightened uncertainty, which will reduce capital spending. Because of that, I have reduced my forecast for long-term economic growth in the United States.   

Robert C. Fry, Jr., Ph.D.
Chief Economist, Robert Fry Economics LLC
302-743-8553
RobertFryEconomics@gmail.com,
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