U.S. economy will collapse by 2026 on Trump’s tariffs, says Morgan Stanley

Donald Trump’s proposed tariffs will throw the U.S. economy into chaos by 2026. Morgan Stanley’s chief global economist, Seth Carpenter, says these tariffs are a surefire way to drive up inflation and tank growth.

The plan is to slap a 10% to 20% tariff on all imports and hike up to 100% on goods coming in from China. Trump says it’s all about “extracting funds” from other countries. Economists say it’s more like slashing your own tires and calling it a shortcut.

Carpenter predicts a “big negative shock” if these tariffs hit all at once. Speaking at Morgan Stanley’s Asia Pacific Summit, he warned that even a gradual rollout would choke the economy over time.

“Tariffs are a drag on growth for the U.S., not just the countries targeted.” According to Carpenter, 2025 will see the start of the fallout, but by 2026, the damage will be impossible to reverse.

How the tariffs will wreck everything

If Trump adds his tariffs to the ones Joe Biden already has in place, the U.S. economy will be hit on multiple fronts. Industries like cars, consumer electronics, machinery, construction, and retail will see prices surge. And no, companies won’t eat the extra costs—they’ll hand those right to the consumer.

Take Trump’s proposed 60% tariff on Chinese goods. Pair that with Biden’s 100% tariff on electric vehicles from China, and you’ve got a recipe for disaster in the auto industry.

Higher import costs will bleed into companies like Apple and Microsoft, which depend on global supply chains. The ripple effect? Price hikes on phones, computers, and pretty much everything else you buy.

The consumer price index ticked up 2.6% in October from the previous year, slightly more than September’s 2.4%. Inflation is slowing after years of chaos, but if Trump’s tariffs land, say goodbye to that progress.

The Federal Reserve has been cutting rates to keep the economy alive. Tariffs could undo all that work, warns Ben Emons, founder of FedWatch Advisors. Markets might even price out rate cuts entirely in 2025 if inflation spikes again. Growth will slow, interest rates will freeze, and the economy could spiral.

China’s next move

Trump’s tariff hammer has left China scrambling. At back-to-back global summits, Chinese President Xi Jinping has been on a mission to save what’s left of international trade.

His message? Don’t follow Trump down this path. Xi wants to rally global leaders around free trade, claiming Trump’s tariffs will wreck not just U.S.-China relations but the entire global economy.

At the G-20 and APEC summits, Xi repeated one thing: stop building walls, start tearing them down. He’s desperate to prevent other countries from jumping on Trump’s protectionist bandwagon. The man is playing the long game, trying to position himself as the adult in the room while making Trump’s administration look reckless.

Xi’s also been meeting leaders nonstop, from German Chancellor Olaf Scholz to French President Emmanuel Macron. The goal? Stop trade wars before they start. Xi even pleaded with Europe to drop its tariffs on Chinese electric vehicles.

Meanwhile, in South America, Xi is building alliances left and right. He opened a $1.3 billion port in Peru and talked trade with Mexico and Argentina. Leaders there seem eager to cozy up to China, especially if Trump’s tariffs cut off U.S. trade opportunities.

China’s economy isn’t exactly thriving though. Manufacturing growth is at its highest since World War II, but the country’s facing a real estate crisis and deflation. Trump’s tariffs could shave several percentage points off China’s GDP, pushing an already struggling economy closer to the edge.

Goldman Sachs says this might force China to focus on domestic consumption, something its leaders have resisted for decades.

What’s next for the U.S. and its allies?

While Xi’s on a charm offensive, America’s allies are in a tough spot. Canadian Prime Minister Justin Trudeau has already voiced concerns about Chinese investments in Mexico. He’s hinted that Canada might tariff Chinese goods too, especially in the electric vehicle space.

Australia’s Anthony Albanese also emphasized that his country’s loyalty lies with the U.S., not China. Then there’s the U.K. Prime Minister Keir Starmer. He’s trying to smooth things over with China while tackling tough topics like Taiwan, Hong Kong’s democracy movement, and human rights abuses.

In one heated meeting, Chinese officials even kicked British journalists out of the room after Starmer hit a nerve. It’s clear that tensions aren’t easing anytime soon.

Domestically, Trump’s tariffs could backfire politically. While his base might cheer the “America First” rhetoric, industries and workers will bear the brunt. Higher prices on cars, electronics, and everyday goods could turn supporters against him, especially in swing states.

Manufacturers relying on imports will have to cut costs somewhere, and that usually means layoffs. Xi, meanwhile, is playing both sides. On one hand, he’s pushing back against U.S. aggression.

On the other, he’s trying to calm the room, insisting China doesn’t want conflict. During a meeting with Biden, Xi said China wouldn’t sit by if its strategic interests were threatened.

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