High fences, low growth: Simulating the latest tariff effects
Summary
The upshot of President Trump's recent tariff announcement is an escalation that redefines America's role in global trade. A roughly tenfold increase in the effective tariff rate to north of 20% from just over 2% heightens the risk the U.S. economy slips into recession this year. Whether the long-term wager on a return to a golden age of U.S. manufacturing pays off remains uncertain, but the change in the near-term prospects for the economy are not. Our model-based estimates point to weaker growth, higher inflation and increased unemployment.
Made in America...paid for in America
Financial markets have done an about-face over the past six weeks as global trade tensions and tariff rates have ratcheted higher. The probability of higher inflation, lower economic growth and weaker corporate profits has risen in our view, and markets have reacted accordingly. Since February 19, the S&P 500 has shed over 10% of its value, the rule-of-thumb for a market correction.
Now that April 2 has finally come and gone, the question for businesses and financial markets alike is to consider which is worse: the towering level of uncertainty we have experienced in recent weeks (Figure 1), or the “certainty” revealed in the Rose Garden, which amounts to a major rethinking of America’s role in global trade. Let's start by unpacking the details.
The majority of new levies fall into two buckets: (1) a 10% universal tariff that will apply to all U.S. imports, effective April 5, and (2) baseline tariff rates that will be higher for nearly 60 countries with the application of “reciprocal” tariffs (11%-50%), effective April 9. Tariffs on foreign auto and parts imports (excluding those covered by the USMCA) also went into effect April 3. The 25% tariffs on steel and aluminum remain in place.
Author
Wells Fargo Research Team
Wells Fargo
