A Move Away From Free Trade
President Trump says long-term gain will be worth short-term pain, but the pain could be significant this year.

To help you understand what is going on in the economy and beyond, our highly experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts (Get a free issue of The Kiplinger Letter or subscribe). You'll get all the latest news first by subscribing, but we publish many (but not all) of our forecasts a few days afterward online. Here’s the latest...
Now comes the big test for the economy: Can it withstand the costs of new tariffs while awaiting potential benefits later, without slipping into recession? President Donald Trump is betting that it can. Businesses and investors aren’t so sure.
While Trump is levying tariffs selectively — enacting some, threatening more, holding off on still others as a bargaining move on other issues — a move away from free trade is clearly here. Businesses, consumers and investors need to adapt to an environment in which many imports cost more, some supply chains get scrambled, and U.S. exports become less competitive due to retaliatory tariffs. Hence, the recent sell-off on Wall Street, as concerns about tariffs hurting corporate earnings combine with broader concerns about the economy.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Short-term pain, long-term gain?
For now, Trump isn’t budging. He thinks that some short-term pain is worth the long-term gain of bringing more manufacturing back to America. He may be right. Some firms are announcing that they will start making, or make more, products in the U.S. Among them are Hyundai, Honda, Volkswagen, Volvo, server maker Inventec, luxury-brand owner LVHM, Compal Electronics and Campari, the spirits maker. But forcing a major rebound in U.S. manufacturing is a long-term endeavor. Tariffs need to be both painful and long-lasting to justify investing in plants here.
Meanwhile, the costs of new tariffs arrive quickly. Consumers pay more as importers pass along part of the tariff cost. Manufacturers that rely on imports of materials or components see their costs rise, or worse, slow down production if certain goods are no longer economical to import. Higher costs risk fueling inflation. These concerns are likely behind the recent deterioration in consumer sentiment.
Shallow recession could hit this year
Our take: GDP growth is going to take a hit, and recession risk has risen. The economy still has key sources of strength. The unemployment rate remains low, even with recent government layoffs. As long as employment holds up, consumers will too, even if it strains their finances somewhat. So for now, outright recession doesn’t seem imminent. But a shallow one could hit later in the year as tariffs bite. If businesses slow investments and hiring due to confusing trade policy and consumers rein in spending due to worries about their jobs, the economy can’t help but suffer.
All this puts the Federal Reserve in a bind. If GDP is slowing but inflation is rising, the Fed has to choose which problem to address and which to let worsen. Since tariffs generally lead to one-time price increases, the central bank is likely to downplay the inflation risks, at least initially. But if tariffs lead consumers to think that more price increases are coming, that mindset can become self-perpetuating. That may tie the Fed’s hands on interest rate cuts just when the economy needs them.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
Related Stories
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.
-
IRS 1099-K Threshold for 2025 Taxes Just Changed: What to Know Now
Tax Law After years of uncertainty and changing requirements, the 1099-K reporting rules for 2025 are now set, and the thresholds have changed since last year.
-
The 'Permission to Spend' Rules of Retirement Spending
Here’s how to spend guilt-free when you are in retirement.
-
Apple Readies for AI Upgrade with New iPhones
The Kiplinger Letter The tech giant has stumbled when it comes to artificial intelligence, but a new batch of iPhones will help it make headway.
-
Japan Enters a New Era of Risk and Reform
The Kiplinger Letter Japan has entered a pivotal moment in its economic history, undertaking ambitious policy and structural reforms to escape from decades of stagnation.
-
How Consumers Are Tinkering with Cutting-Edge AI
The Kiplinger Letter Companies launching artificial intelligence tools are jostling for consumer attention. Some products are already building a deep connection with users.
-
After Years of Stagnant Growth, Hope Emerges for EU Economy
The Kiplinger Letter Can a German fiscal push outweigh French political peril?
-
Small Businesses Are Racing to Use AI
The Kiplinger Letter Spurred on by competitive pressures, small businesses are racing to adopt AI. A recent snapshot shows the technology’s day-to-day uses.
-
How AI Puts Company Data at Risk
The Kiplinger Letter Cybersecurity professionals are racing to ward off AI threats while also using AI tools to shore up defenses.
-
Trump's Economic Intervention
The Kiplinger Letter What to Make of Washington's Increasingly Hands-On Approach to Big Business
-
Where is the Foreign Dividend Boom Headed?
It's been a golden six months for foreign dividend stocks, but can any be relied on for predictable income going forward? Here are some options.