The Trump tariffs, a recession and the economy. What does HR do now?

Let’s say you are a responsible executive leading—or helping lead—an organisation whose mission and employees you care about. That mission might include shareholder value; at a minimum, it includes concern about the organisation’s survival. The Trump administration has headed down a path that will upend much of what has been familiar in your world, especially for businesses. As an HR leader, what do you do? And what do you tell your employees?

Assuming that the president is not just using the new round of tariffs to put temporary pressure on individual countries to change their policies—as in leaning on Mexico to crack down on drug gangs and on Canada to … well, who knows?—the tariffs will be a profound undoing of the global economy.

If your business involves buying and selling internationally, which includes having some tie to an international supply chain, you will see changes in weeks. If you are in the services business, you will see changes in months, as retaliatory tariffs may come against US-based companies, including in insurance, banking, consulting and so forth. As for everyone else, you will see changes within a year.

The Trump tariffs: What are the immediate impacts?

What are those changes? Inflation and a lot of it.

Can’t we switch to US-produced products? It takes a long time for businesses to start producing products they have not made before. There are not many things “made” in the US that do not have components that come from outside the country. The prices of those components will go up to pay for at least some of the tariffs. Therefore, so will the prices of the final products. Will the increase in demand for these and other US products cause prices to go up? Of course, it will. That is the mechanism that attracts investors to build capacity in the US.

The biggest change, which will swamp everything else the administration is trying to change, will be a sharp economic recession. The administration notes that there will be short-term pain from this high tariff policy. That is the immediate recession that will start very soon.

Unfortunately, there is not much doubt about that happening. One simple reason is that demand for US products will fall sharply as other countries impose reciprocal tariffs on US exports. The other reason is that higher prices depress spending. Further, the Trump tariffs are taking money out of consumption and then parking it with the government, another depressing effect.

The Federal Reserve Atlanta Bank’s forecast for economic growth this year was previously close to 4%–very robust growth. After this month’s tariff announcement, its forecast shifted to negative 4%. Oh, and the stock market crash this past week—which has not finished yet—is a profoundly important market that also takes huge amounts of money away from possible consumption and investments. This situation is the equivalent of the 2009 financial crisis and The Great Recession that followed it. It will happen almost that fast if the tariffs stay on.

A shrinking economy

It will take a decade, probably longer, for the tariffs to cause manufacturers and producers to shift a substantial share of production back to the US. In autos, for example, only about half of the value of a US-“manufactured” car actually comes from the US now. To shift even that production closer to 100% will require rebuilding the steel industry, then building the equipment to produce components now coming from abroad (including software, electronics and so forth). US manufacturers have already noted that they cannot bring in the machinery needed to start new manufacturing because those are now mostly built in China, and so, subject to those tariffs.

Assuming all this could be rebuilt, the costs of doing so will be enormous, and the operating costs after will be higher because we just do not have the comparative advantage to build everything here, such as cheap labour for low-value parts. All this will shrink the economy. There eventually would be a higher proportion of products associated with those new “built in America” operations, but because of all these higher costs, the entire economy will be much smaller, which means fewer overall jobs.

It’s time for leaders to say ‘something’

Okay, back to you, leaders.

I think HR and business leaders should tell employees something—even if it is that you do not know how to respond yet: “We don’t have a plan we are preparing to roll out.”

If you do not say that, employees will make up a story about the organisation’s response to the economic situation, and this story will be worse than what you are likely to do. So, tell them what you are waiting to see—whether these tariffs are for real or will be rolled back.

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If you are thinking about cutting employees and jobs, now anticipating the recession, that is a huge risk. The evidence from prior recessions is that companies that cut early and hard—what investors like—ended up worse off because their competitors who kept their staff ate their lunch on the upturn, grabbing business, while those who cut struggled to get going again. We only have to look back three years at the post-Covid staffing shortage to see evidence of that.

We can see another lesson from the Covid period: Employees trusted their employers more than other sources of information about the pandemic. That is likely to be true now as well.

What do we tell panicking employees who, this past week, saw their retirement income and investment savings crumble? I think you should tell them that you empathise with their problem, at a minimum, and will keep them posted on any ideas for dealing with all this. It is an extraordinarily worrying situation. Employees will be looking to their employers for some reassurance. The best we can probably say is, “We feel your pain,” and “We don’t know yet what to do.”

That is not much—but far, far better than saying nothing.

About the Author: Peter Cappelli is HR Executive’s Talent Management columnist and a fellow of the National Academy of Human Resources. This article was first published on HR Executive.