Negative growth along with an inflation boost equals stagflation.
That’s the conclusion from Wells Fargo economists—Tim Quinlan, Sarah House, and Azhar Iqbal—on the impact to the U.S. economy from President Donald J. Trump’s trade policies.
While the 25 percent levy on imports from Mexico and Canada are postponed for 30 days, the 10 percent tariff on certain goods from China went into effect Tuesday morning. China has retaliated with tariffs of its own on select imports—15 percent on coal and liquefied natural gas and 10 percent on crude oil, certain vehicles, and agricultural machinery for now, starting Feb. 10—from the U.S.
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While the 25 percent tariffs on America’s North American trading partners could cast both of those economies into a recession, for the US GDP growth would slow and the annual rate of consumer price inflation is expected to be a half-a-percentage point higher by year-end. Still unclear is the timing and duration of the tariffs, as well as which ones actually get implemented, either for the U.S. proposals or the retaliatory levies. The Wells Fargo economists said that generally, the downward impact to economic growth occurs one quarter after the tariffs take effect. They modeled two scenarios, one that is more targeted and the affected countries retaliate, and the other which includes a potential global expansion that includes retaliatory tariffs on U.S. exports of 10 percent.
“While growth subsequently picks up after tariffs are implemented, the U.S. economy would be about 1 percent smaller at the end of 2026 in the more targeted tariff scenario, and about 1.5 percent smaller in the expanded trade war scenario,” the economists concluded in a research note. They emphasized that the simulations represented a dire-case scenario, and that some imports may get a carve-out, or that the tariffs could be applied temporarily.
TD Cowen’s Washington strategist Chris Krueger said that increased tariffs is a matter of when, not if. He believes the first key date for inkling on an overall trade policy framework is April 1, when a report from Commerce, Treasury and the U.S. Trade Representative is due on multiple topics ranging from goods deficit, exports, discriminatory taxes, China Phase One Deal and the U.S.-Mexico-Canada Agreement (USMCA) to Buy America.
That said, Krueger on Tuesday said there’s a chance Feb. 18 could be the next key date for a tariff announcement, this time in connection with the European Union (EU) in connection to sectors that include chips, pharmaceuticals, oil/gas, and metals.
That’s not all. He cites two other areas to watch. One is an OECD (Organization for Economic Cooperation and Development, comprised of 38 member countries including the U.S.) Pillar Two 15 percent global minimum tax on the EU, the U.K., Japan, South Korea, Vietnam and Argentina. OECD was established in connection with perceived corporate tax evasion, targeting profits by multinational corporations in countries where it does business.
Also of concern is the digital services tax (DST), or OECD Pillar One. Europe in 2019 began implementing DSTs when former U.S. President Barack Obama was in office. The U.S. and France, during Trump’s first presidency, agreed to put the DSTs—which placed a levy on revenues earned by firms such as Google, Apple, Facebook, and Amazon from the digital services they provided in a country—on hold. Trump said at the time that he was willing to play hard ball by slapping reciprocal tariffs if countries aren’t willing to make concessions. OECD member countries temporarily paused implementation of their DSTs until January 2026, allowing time to find a collective resolution on the matter. The DST countries Krueger cited were Austria, Canada, Denmark, France, India, Italy, Poland, Spain, Switzerland, Turkey and the U.K.
Krueger said the thinking is that Trump is threatening retaliatory levies to exert pressure to have the countries remove their taxes against U.S. companies that are largely Big Tech firms and pharmaceuticals.
“We believe Trump is perfectly comfortable being a policy paradox and pushing competing policies (and people),” Krueger and his colleagues at TD Cowen Washington Research Group concluded in a policy report on Tuesday. “This ‘chaos premium’ only increases his leverage in negotiations and keeps him at the molten center of the global policy zeitgeist.”
Meanwhile, Trump on his first day in office on Jan. 20 withdrew from the OECD tax treaty—140 countries are signatories—negotiated in 2021 by the Biden administration. His executive order said that the OECD global tax deal “allows extraterritorial jurisdiction over American income,” and that it also “limits” America’s ability to enact tax policies that serve the interests of American businesses and its workers.
UBS chief economist Paul Donovan in a podcast Tuesday cited the three retreats by Trump from imposing aggressive taxes: Columbia in connection to the deportation of migrants, as well as the pause on Mexican and Canadian tariffs. He said there could be long-term consequences from these actions.
“Foreign countries have less reason to trust that the U.S. will honor trade treaties, reducing the incentive to make concessions,” Donovan concluded.
