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Investing.com -- Markets may be breathing a sigh of relief as President Trump backs away from the harshest ‘Liberation Day’ tariffs, but JPMorgan analysts warn the global trade war is far from over, with the risk of renewed escalation and retaliation looming if trade deal negotiations with Washington break down.
“The trade war is not over and can easily re-intensify, taking tariffs higher from current levels. The July 8 end to the 90-day reprieve from Liberation Day is approaching. Beyond China and the UK, there have been few deals,” JPMorgan said, cautioning that the current calm could be short-lived.
The rollback of U.S.-China tariffs has helped reduce the immediate risk of a global recession, with JPMorgan lowering its U.S. recession probability from 60% to a still-elevated 40% and removing its formal recession call. The effective U.S. tariff rate has dropped by nearly 10 percentage points to 13.4%, paring back the direct drag on global GDP to 0.5 percentage points—half the hit projected at the height of the trade war.
But the relief is uneven. While China and the UK have secured deals, other major partners like the EU, Canada, and Japan, who are seeking full removal of tariffs, remain locked in tricky negotiations. The EU, in particular, is pushing for full tariff removal, but the U.S. is insisting on a minimum 10% rate and possible sectoral increases—a stance the EU is unlikely to accept without retaliation, raising the risk of a regional trade conflict.
The analysts don’t expect President Trump to return to the ’Liberation Day’ tariffs. but rather keep universal tariff rates around 10% for most countries, the risk remains that failed negotiations could trigger a new round of country- and sector-specific tariffs. “A move up in sector- and country-specific tariffs would likely push the US back to the brink of recession,” the analysts warned.
The Trump Administration’s decision to exempt sectors of strategic importance—including electronics, pharmaceuticals, copper, lumber, energy, and critical minerals—from the 10% tariff floor may be short-lived. JPMorgan estimates that a 10% tariff on these products (excluding energy) would raise the effective U.S. tariff rate to 15.8% (11.8% ex-China), while a 25% tariff would raise it to approximately 18% (14.3% excluding China). “In this case, the risks of US recession would once again jump,” the analysts said.
The ongoing trade negotiations, some of which remain fraught with difficulty, ensure “risks to tariffs are tilted to the upside,” and that policy uncertainty remains a headwind to global growth, JPMorgan said. "The IMF estimates that trade policy uncertainty roughly doubles the direct tariff shock to US GDP," it added.
While the trade war may be tempered for now, the pullback from recession-like levels reached in April is "likely to remain incomplete and elevated trade policy uncertainty is therefore still a headwind to growth even if the risk of second round effects––supply bottlenecks, input shortages––are reduced," the analysts said.