Two possible tariff scenarios for 2025: Wells Fargo By Investing.com

In a note dated Tuesday, analysts at Wells Fargo analyzed the potential impact of tariffs in the context of the 2024 presidential campaign, focusing in particular on two distinct scenarios for 2025. With foreign trade policy emerging as a critical issue amid rising geopolitical tensions, the implications for the U.S. economy and investment landscape are significant.

Scenario 1: Limited tariffs

Tariffs would be imposed selectively, targeting specific countries or industries without escalating into a broader trade war. According to Wells Fargo, such an approach would provide some flexibility in the supply chain.

The shift from China to countries like Vietnam and Mexico is likely to prompt companies to shift their sourcing locations to circumvent tariffs. As a result, tariffs will have a less direct impact, making supply chains more resilient and diverse.

Under a Democratic-led administration or a Trump administration that exercises restraint in imposing tariffs, Wells Fargo sees this scenario as the most likely.

Scenario 2: Broad and aggressive tariffs

The second alternative involves imposing high and broad tariffs, such as the proposed 60% tariff on Chinese imports and 10% tariffs on all other goods entering the country.

According to Wells Fargo, the potential economic disruption this issue could cause is severe. As a result of these tariffs, companies will have a hard time adjusting quickly, leading to inflation and pressure on profits.

A slowdown in global trade and economic activity could negatively impact consumer goods and industries that rely heavily on global supply chains.

Economic implications

Wells Fargo expects tariffs, regardless of their scope, to initially contribute to inflation by restricting low-cost imports and boosting the prices of domestic substitutes. This inflationary pressure could lead to higher interest rates and a slowdown in the economy, particularly affecting credit-sensitive sectors such as housing.

The broader economic impact will depend on how well businesses and consumers adapt to the new trading environment.

In light of these potential scenarios, Wells Fargo recommends a cautious investment approach. The company suggests focusing on good investments in local companies with strong balance sheets and cash flows.

Speculative sectors such as consumer discretionary goods, high-yield bonds, and small-cap stocks are expected to be particularly vulnerable under an aggressive tariff regime. Moreover, the focus on national security and industrial policy is likely to lead to long-term shifts in trade practices, reinforcing the need for a strategic and diversified investment portfolio.

FargoInvesting.comscenariostariffWells