Will Donald Trump's tariff threats result in a successful and benign negotiating outcome or serious trade war escalations? UBS believes an aggressive policy by the US is the most likely scenario.

US President Donald Trump has not slowed down his trade war rhetoric since taking office. He has threatened a 25 percent tariff on Canada and Mexico as well as 10 percent levies on China starting February 1. He told European executives at the World Economic Forum in Davos to make their products in the US or face import restrictions.

How much of this is negotiating tactics versus real talk? What will ultimately be the outcome?

Base Case: 30 Percent for China

According to a UBS forecast, an «aggressive» scenario is the most likely outcome with a 50 percent probability. This will include an increase over time to a 30 percent effective tariff on China, primarily on industrial and capital goods. China is expected to retaliate with sanctions on American companies and limits on critical mineral exports, though the impact on the US is mild.

The US will pursue efforts to protect and promote technology interests, including critical minerals. The country will focus on Rules of Origin to limit the transshipments of goods through Vietnam, Mexico and elsewhere.

Tariffs will also be imposed on EU autos, including electric vehicles, with Europe subsequently retaliating.

Other Scenarios

The Swiss bank believes the second most likely outcome is a «highly aggressive» scenario (25 percent) with universal tariffs of 10-20 percent imposed on all US imports and a higher 60 percent rate on Chinese goods. High, broad and sustained tariffs of up to 25 percent could also be imposed on Canada and Mexico. Court challenges against the use of presidential authority to impose universal tariffs will fail with retaliation occurring globally.

Its two other predictions include a «limited» (15 percent) and a «benign» (10 percent) scenario with only some tariffs.

Still Solid Growth

Despite the pessimistic trade policy outlook, UBS is still projecting solid economic growth in the US with the Federal Reserve cutting interest rates by 50 basis points in 2025.

For investors, it believes that equities remain attractive with an 8 percent upside for US stocks this year, although near-term tariff-related volatility is likely. It is positive on high grade and investment grade bonds with a base case for the 10-year Treasury yield to fall to 4 percent by end-2025 and more upside to gold.