Unseen in 30 Years: U.S. Tariffs Risk Stagflation

Muhammad Zamir Assadi

Economists and expert in the international economy have been viewing that the US tariffs risk stagflation – a situation of high inflation and stagnant growth.

Robin Xing, Chief China Economist at Morgan Stanley, warns that the U.S. tariff offensive represents “a transformation unseen in the past 30 years” and cautions that its repercussions may reshape American fortunes for years to come. What began as pressure tactics designed to coerce trading partners into concessions has morphed into a broader protectionist doctrine, and its immediate toll is increasingly evident within the United States itself.

According to Xing, the most striking consequence has been the emergence of permanent scars on the U.S. economy. He notes that businesses are “reluctant to invest” and consumers are bracing for higher prices, factors that have combined to erode household wealth and depress equity markets. This negative wealth effect, he argues, has already elevated the risk of recession this year, and—more ominously—has instilled lingering doubts about the consistency of future trade policy. For multinational firms weighing investments, the uncertainty wrought by “capricious and inconsistent tariff policies” may be as damaging as the tariffs themselves, prompting a reevaluation of commitments across all major markets.

Even as administration spokespeople tout high tariffs as leverage to bring manufacturing home, Xing underscores the irony that these measures reverse more than three decades of globalization that once served U.S. interests well. He explains that, historically, American multinationals reaped outsized profits by expanding into markets with lower costs, then channeling returns back to U.S. bond and equity markets—thereby reinforcing the dollar’s global primacy. But now, he says, that cycle is in jeopardy: “If future policy fluctuations remain high and long-term tariffs persist, major corporations will find investing almost impossible,” he warns, foreshadowing a fundamental shift away from what has been known as American exceptionalism.

Beyond these strategic concerns, the U.S. economy is confronted by its own cyclical vulnerabilities. After years of post-pandemic fiscal stimulus, nominal growth is decelerating, while inflation and the federal deficit sit at elevated levels. “We are witnessing the classic fallacy of “break first, and then build,” Xing observes, referring to the administration’s destructive sequence of tightening immigration rules, imposing trade barriers, and attempting domestic fiscal rectification. The cumulative effect, he suggests, is mounting pressure on both markets and Main Street.

In this context, the Federal Reserve’s room for maneuver is shrinking: with interest rates already restrained and inflation still above target, monetary policy offers limited relief. Fiscal policy, too, is constrained by a ballooning deficit that leaves minimal space for meaningful tax cuts or stimulus packages. Consequently, Xing foresees a period of stagflation—marked by sluggish growth alongside persistent price pressures—followed by a deeper contraction should policymakers fail to adjust course.

Ultimately, the tariff war underscores a broader reckoning about globalization’s winners and losers. As the debates of recent years have highlighted, soaring corporate profits have not always translated into broad-based gains, fueling political backlash and calls for protectionism. Xing’s analysis reminds us that while trade policy can be a potent tool, its indiscriminate use risks inflicting wounds that outlast any immediate gains—and could precipitate a new era of economic volatility for the United States.