After a turbulent 2025 that shocked global trade and financial markets, 2026 was shaping up to be a time for the U.S. economy to look past President Donald Trump’s tariffs.
Not so fast.
Tariffs are back on the agenda again only a few weeks into the new year. On Saturday, Trump announced eight NATO allies would be hit with 10% tariffs next month that will rise to 25% by June until a “Deal is reached for the Complete and Total purchase of Greenland.”
While not all the targeted countries are members of the European Union, the new levies come despite a trade deal reached in July that set a 15% tariff on most EU products and obligated it to invest hundreds of billions of dollars in the U.S.
And on Monday, Trump said countries that do business with Iran would be hit with a 25% duty on trade with the U.S., threatening to blow up a fragile tariff cease-fire with China, which is a top importer of Iranian oil.
Now, the U.S. faces the prospect of a new cycle of retaliation and escalation. On Saturday, French President Emmanuel Macron hinted at what comes next.
“Tariff threats are unacceptable and have no place in this context. Europeans will respond in a united and coordinated manner should they be confirmed,” he posted on X. “We will ensure that European sovereignty is upheld.”
It wasn’t supposed to be like this. Wall Street, Corporate America, and consumers were looking ahead to an economic boost from tax cuts in Trump’s One Big Beautiful Bill Act as well as more calm on the trade front.
On Friday, analysts at Bank of America highlighted an exceptionally upbeat forecast for 2026 GDP growth, putting it a 2.8%—well ahead of the consensus for 2.1%.
“The key drivers are easier fiscal and monetary policy, and our expectation of more growth-friendly trade policy,” BofA said in a note.
Meanwhile, the Federal Reserve was also anticipating continued moderation in inflation this year as policymakers assumed that tariffs would deliver a one-time jolt to prices instead of sustained upward pressure.
A new flurry of import taxes could put that expectation at risk and jeopardize future rate cuts if inflation remains stubbornly above the Fed’s 2% target.
The Fed’s most recent Beige Book survey of economic and business conditions around the country was also filled with hope that tariff anxiety was finally easing:
- “The outlook improved on balance, with more optimism and a bit less caution than in the last report, boosted in part by reduced uncertainty from tariffs.”
- “Retail and tourism contacts were cautiously optimistic heading into 2026, based on recent stability in consumer spending, greater clarity on tariffs, and Boston’s 2026 World Cup soccer events.”
- “Firms reported an abatement of tariff-related uncertainty from a combination of stabilized tariff policy and their own adjustments, such as the completion of a new production facility by a frozen foods manufacturer.”
Trump’s new tariffs represent a sharp reversal from late last year, when the administration rolled back some levies on food imports and delayed hikes on furniture as voters demanded more affordability and relief from higher prices.
Trade-exposed sectors of the economy have already suffered a heavy toll from the tariffs. For example, manufacturers have shed 70,000 jobs since Trump unveiled his “Liberation Day” duties in April 2025.
And the Institute for Supply Management’s manufacturing index has been in negative territory for 10 consecutive months, meaning activity has been contracting.
Some relief might be ahead. The Supreme Court is due to issue a ruling soon on Trump’s ability to impose tariffs under the International Emergency Economic Powers Act.
A decision against the administration could limit his powers on trade. But depending on how nuanced a ruling is, Trump could retain some leeway. He also has vowed to use other laws to invoke fresh tariffs if he loses in court.
That shouldn’t be a surprise given that Trump based his re-election campaign on tariffs and has called himself “Tariff King,” “Tariff Man” and “Mr. Tariff” over the years.
Considering his instincts to quickly pull the trigger on tariffs across a broad range of situations, Wall Street may need a new playbook.
“Most economic models don’t quantify the geopolitical and relational damage caused by erratic tariffs on allies,” Erica York, vice president of tax policy at the Tax Foundation, said on X. “Trump’s tariff policies impose real costs that go far beyond higher taxes and slower GDP growth.”
