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.
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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.
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.