President Donald Trump is likely to end up tamping back the tariffs, and that will prove good news for investors.

Trump’s Tariffs and Prices

Trump has raised the average tax on imports about 20 percentage points or 2% of GDP. Estimating exact amounts is difficult, because many imports will shift from China to lower tariffed countries like Vietnam and domestic suppliers.

Foreign producers can withstand modest tariff increases, but Chinese manufacturers can’t absorb more than a fraction of a 145% tax. Shipments from the Middle Kingdom are shutting down.

The direct effect on U.S. inflation shouldn’t be huge, because imports are only about 11% of GDP. However, those price and aggregate demand effects will spread across the economy, because so many everyday items have some import content.

Congress could make the average American better off by cutting income taxes by the billions in new revenues collected, because foreign exporters, not U.S. consumers, will bear some portion of the tax bill.

However, Trump can’t lower taxes quickly by executive order to cushion the immediate consequences for inflation and real incomes.

Recession Fears

President Biden bequeathed a robust economy, but weaknesses were emerging.

In 2024, GDP grew 2.8%, but American voters were unhappy about inflation. Campaigning, Trump promised lower prices, but now his tariffs will boost those.

Economic recoveries are often extended through borrowing and then slow as consumers and businesses deleverage.

By early 2025, credit card delinquencies were at levels not seen since the Global Financial Crisis. Recession fears were eroding consumer confidence, and retail sales slowed.

Still, in January, economists forecasted 2025 growth at 2.0%. With imported goods accounting for 11% of GDP, a 20% tariff should curb domestic aggregate demand by only 0.3%

However, U.S. exports will be negatively affected by consumer boycotts abroad and retaliation—China has raised tariffs and penalized some U.S. businesses and other trading partners are considering similar moves.

Supply disruptions and logistical inefficiencies imposed as businesses seeking substitutes for Chinese products are not well captured by econometric models.

The odds of a recession or terribly slower growth that pushes up unemployment are at least 50%.

Midterm Elections

Democrats may be pixilated about what their message should be, but their voters are not hibernating. In recent special elections, Democrats won or Republicans prevailed by significantly thinner margins than last November.

Somewhat, those outcomes reflected the natural advantage Democrats enjoy in off-year elections. Their supporters are more highly educated, politically engaged, progressive and likely to vote in non-presidential contests than Republicans and Trump’s base specifically.

No politician or political party is impervious to inflation, unemployment and recessions. If inflation doesn’t decelerate again or business activity swoons without recovering by mid-2026 Republicans will relearn a hard lesson about the primacy of economics.

Trump’s Wager

Essentially, Trump is betting he can negotiate new trade agreements with Japan, the EU and others quickly. That could heal many supply side problems, but it’s a tough climb.

Zero for zero on tariffs is not enough. Trump wants addressed thorny non-tariff barriers—customs administration, product standards and risk management, digital services taxes, subsidies and the like—and cooperation on containing China.

That’s complex stuff that makes writing tax legislation in Congress look like a grade school spelling test.

The Office of the U.S. Trade Representative has only about 225 employees. Even with help from other departments, it will be considerably challenged to negotiate new trade agreements within the 90 day suspension window for most reciprocal tariffs.

Better Days for Investors

Trump is accomplishing other elements of his economic agenda—for example, accelerating oil, gas and LNG export development—but beyond a tax bill later this year, he faces a tough road.

His tariffs are unpopular, and renewed inflation will weaken his support among voters. Republicans in Congress will push back on his initiatives as they start worrying about their midterm prospects.

During his final two years, Trump may well confront a Democratic House and even Senate, encounter difficulties funding his deportation program and face intense scrutiny of his cultural agenda.

Tax cuts will rally the economy but depending on the outcome of ongoing trade negotiations, higher long-term inflation expectations mean rising prices will remain a nettlesome problem.

The productivity boost from artificial intelligence should mitigate the tariff shock to supply chains as the tax-cut boost to aggregate demand kicks in.

Equities will find footing again, even if investors must endure higher interest rates that accompany inflation.

The market will not likely be again so driven by the full suite of Magnificent 7 but rather those firms creating AI agents that enhance productivity—for example, Microsoft, Oracle, Salesforce and Adobe—but are not facing, for example, Alphabet’s antitrust issues.

Most individual investors have been smart not reallocated away from equities—the Trump tariff tempest will pass.

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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.