Paul Donovan: Tariffs Could «Push US Into Recession Faster»
The global trade war is rapidly escalating after US Donald Trump imposed increasingly higher tariffs on Chinese imports. This could «push the US into recession faster», according to UBS’ Paul Donovan.
After US President Donald Trump raised tariffs against China to 104 percent, Beijing retaliated once again by announcing an 84 percent tariff on US goods before Washington followed up by pushing its rate to 125 percent. According to Paul Donovan, chief economist at UBS Global Wealth Management, there are dire consequences for all but potentially more so for the US than China.
«The 104 tax on US goods imported from China is dramatic and unless it is reversed quickly, it may well push the US into recession faster than had previously been anticipated,» Donovan said in a recorded commentary posted prior to Trump’s second tariff increase.
«The additional […] tax Trump levied will, of course, be a negative for the economy in China, but it does not double the pain that was previously imposed. The higher tariffs go, the less marginal impact they have on foreign economies.»
«Temu Tax»
In addition, Washington announced that it would up taxes on goods from China that were previously under a de minimis exemption – effectively duty-free low-value packages – further increasing prices for US consumers.
«Ending the de minimis exemption is effectively a Temu tax. Every US buyer of cheap online products from China will be presented with an additional bill from the US government before they can get their hands on their purchase,» Donovan remarked.
Should the Fed Intervene?
The immediate response in markets included not only a drop in equities but also a rise in bond yields. This could potentially result in international money fleeing and a weakened US fiscal position with negative implications for the US economy, particularly the housing market. Should the Fed step in to contain systemic risks? Not under the current conditions, Donovan stressed.
«The bond market has not become disorderly and that means that there is no incentive for the US Federal Reserve to intervene. If, for instance, China were to dump treasuries into the market, price action probably would then become disorderly and just as the Bank of England did during the UK's Truss debacle, the Fed would be justified in stepping in,» he explained.
«Otherwise the Fed should allow the bond market to reflect the economic costs of current policies.»
How Should Investors Respond?
In a separate investment note, UBS advised not to sell equities, highlighting that «periods of market stress have historically and consistently offered long-term rewards for diversified investors who look through near-term volatility, stay the course, and/or put fresh money to work». Its base case is for tariffs to rise before falling in the third quarter as legal, business and political pressure mounts while deals are struck with the S&P 500 recovering to 5,800 by year-end.
«Nevertheless, we believe that from current levels markets will likely require clearer evidence supporting our base case before a sustained recovery emerges,» the bank highlighted. «Potential catalysts could include delays, Congressional objections, court injunctions, or policy reversals from the Trump administration.»
On the US dollar, UBS believes a sustained period of weakness over the medium term is likely if the Fed cuts rates faster than expected in response to economic weakness and investors react to uncertainty by diversifying long-held and profitable USD asset exposures.
