Tariffs, recession risks, and cryptocurrency fluctuations: The impending impact of Trump’s trade conflict

The following is a guest article by Agne Linge, Head of Progress at WeFi.

In recent months, the cryptocurrency sector has been acknowledging a noticeable pro-crypto shift in the U.S. regulatory landscape. This optimism is well-founded – the U.S. president has introduced his own meme coin, the SEC has committed to reducing crypto enforcement actions, and earlier last month, the White House issued its crypto executive order aimed at establishing regulatory clarity.

During Trump’s administration, the Securities and Exchange Commission also implemented SAB 122, which is believed to facilitate crypto adoption. Additionally, there is a significant movement towards a Bitcoin reserve, not only in the U.S. but on a global scale.

Despite this optimism, the past week has made it clear that the crypto market is now more susceptible to macroeconomic factors than ever before. On the day President Trump announced tariffs on China, Canada, and Mexico, the cryptocurrency market experienced a loss of $2 billion according to Coinglass data.

Some experts suggest that actual liquidations surpassed $10 billion, which is considerably worse than the liquidations seen during the FTX collapse. Factors such as “buy the rumor, sell the news” may have influenced the crypto market.

Currently, there is a temporary halt on the implementation of tariffs, as Trump has agreed to delay tariffs on Canada and Mexico by one month. If enacted, these tariffs could increase the risk of a recession by constraining consumer spending and heightening economic uncertainty.

Tariffs as a Catalyst for Economic Contraction

Tariffs act as a tax on imported goods, aiming to protect domestic industries by making foreign products relatively more expensive. However, this protectionism carries a cost. When tariffs raise the prices of goods, consumers tend to cut back on their spending.

Consumer spending accounts for approximately 68% of the U.S. GDP, so any prolonged decrease in consumption could push overall economic activity below the threshold necessary to avert a recession.

Moreover, employment on all sides would suffer significantly. The proposed 25% tariffs could result in a 0.25% job loss in the U.S. The impact could be much more severe for Canada and Mexico, with projections indicating job losses of up to 3% in both countries.

It is suggested that the implementation of these tariffs could have serious spillover effects. Analysts from Deutsche Bank have also contended that sustained tariffs against Canada and Mexico—two of the U.S.’s largest trading partners—will have “far greater economic magnitude” than the consequences of Brexit on the UK.

Considering the importance of consumer spending in the U.S. and the vulnerability of these neighboring economies to changes in trade volumes, it is not an exaggeration to predict that Canada and Mexico could enter a recession in the coming months if the 25% tariffs are enacted.

The Trade War Escalation and Its Broader Impact

Many stakeholders anticipated that these actions would negatively affect international trade flows, increase manufacturing costs, and raise prices across the board. As domestic and international companies scramble to adjust supply chains, the uncertainty that accompanies such policy changes can further dampen economic activity.

Last week, cryptocurrency markets experienced volatility triggered by these policies. When Trump agreed to postpone tariffs on Canada and Mexico by a month, Bitcoin’s price rebounded from $92,000 to over $100,000.

However, the relief was short-lived when China retaliated with its own set of tariffs, causing the cryptocurrency’s price to retract to around $96,000 within hours. This rapid on-off dynamic underscores how sensitive markets have become to tariff-related news.

Inflation Risks and Federal Reserve Dilemma

Federal Reserve officials have also expressed concerns regarding the inflationary potential of large-scale tariffs. While they have refrained from explicitly linking these policies to their upcoming monetary policy decisions, the warnings are significant.

Former Chicago Fed President Austan Goolsbee highlighted several supply chain threats associated with the implementation of tariffs. Tariffs increase import costs, and as these costs are passed on to consumers, inflation accelerates.

This situation is troubling, given that inflation diminishes real incomes and can intensify recessionary pressures by reducing overall consumer spending. The Fed’s dilemma is pronounced.

On one hand, the central bank aims to control inflation by tightening monetary policy.

On the other hand, a very aggressive approach to interest rates could exacerbate the negative effects of tariff-induced economic slowdowns.

Gold Remains the Primary Safe-Haven Asset

While digital assets like Bitcoin have struggled to maintain stability amid escalating trade tensions, traditional safe-haven assets have seen a renewed surge in demand. According to data from The Kobeissi Letter, gold reached an all-time high on February 3.

The increase in gold prices reflects investors’ instinct to seek refuge amid heightened market volatility and inflationary pressures. The dynamics behind this shift are relatively straightforward. As tariffs elevate consumer prices and undermine global trade, investors have grown wary of the long-term economic outlook.

With the risk of recession and the possibility of further economic tightening, gold’s relative stability makes it an attractive asset.

Looking Ahead

The upcoming weeks will be crucial. If the U.S. continues down this path of aggressive tariff imposition without achieving significant trade concessions, we may very well witness heightened inflation and sustained market volatility.

At the same time, we could anticipate the onset of recession in key partner economies. Policymakers—and investors alike—must recognize that the costs of trade protectionism extend far beyond the immediate realm of international trade.

Ultimately, while some may argue that these tariffs could eventually compel a renegotiation of trade terms, the evidence suggests that the risk of recession—and the accompanying damage to consumer confidence and global liquidity—is too significant to overlook.

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