'Businesses around the world on edge': Trump threats said to create 'giant global cloud'

President Donald Trump could plunge America's two closest neighbors into recession with the stroke of a pen, according to a new report.

The U.S. president has threatened to impose 25-percent tariffs on all goods from Canada and Mexico starting Feb. 1 because he believes they have failed to stop drugs and migrants from coming across the border, but that move could risk a full-blown trade war within North America and disrupt delicate supply chains that have developed over decades, reported CNN.

“This would be a real trade war, not a trade skirmish – this is serious," said Joe Brusuelas, chief economist at RSM. "You would see job loss and people lose their homes."

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The tariffs would send the Canadian and Mexican economies into recession almost immediately and almost certainly increase consumer prices for Americans on many items, economists say, but Wall Street investors seem to believe he's bluffing, because they're not dumping stocks or dimming their growth forecasts.

“We note that in 2019 he also stated that he would impose a tariff of up to 25 percent on Mexico within 10 days but the tariff was never implemented,” Goldman Sachs economists wrote in a report.

Trump might not carry through on his threat – which he has indicated would happen on Day One – to impose the tariffs, especially if Canada and Mexico agree to renegotiate the US-Mexico-Canada Agreement (USMCA), which replaced NAFTA during Trump's first term, this year instead of next year.

“Trump probably hopes the 10-day delay will crack the whip to get Mexico and Canada to act,” Heidi Crebo-Rediker, a senior fellow in the Center for Geoeconomic Studies at the Council on Foreign Relations.

Trump told international business leaders during a virtual address at the World Economic Forum that the U.S. did not need imports from Canada and Mexico, but a recent analysis from the Peterson Institute for International Economics found that 25-percent tariffs would erase $200 billion from U.S. gross domestic product (GDP) and $100 billion from Canada’s smaller economy, and cut 2 percent from Mexico’s growth rate.

“These tariffs would damage all the economies involved, including the U.S.,” wrote Peterson Institute researchers Warwick McKibbin and Marcus Noland in their analysis.

The diversified American economy would be much better positioned to withstand a trade war, economists say, but Mexico would be particularly vulnerable with its heavy reliance on exports to the U.S. – and an economic catastrophe there would only worsen matters at the border.

“For Mexico, a 25 percent tariff would be catastrophic,” the Peterson Institute researchers said. “[Economic troubles] increase the incentives for Mexican immigrants to cross the border illegally into the U.S. – directly contradicting another Trump administration priority.”

Canada has already threatened to retaliate to Trump tariffs with their own tariffs on American products, including everything from steel to whisky.

“America is not an economic island," said Desmond Lachman, senior fellow at the center-right American Enterprise Institute, "and serious economic problems abroad could come back to harm our financial system, our export sector and adversely impact our companies’ earnings."

For now, business leaders and investors are biding their time and hoping that the newly inaugurated president is only bluffing.

In the meantime, CEOs and investors are trying to make sense of the on-again, off-again tariff threats and game out what comes next.

“For the sake of business certainty and visibility, particularly for small businesses, figure out what you’re doing with tariffs as quickly as possible,” wrote Peter Boockvar, chief investment officer at The Bleakley Financial Group, in a note this week implicitly addressing Trump. “Right now, it’s just a giant global cloud overhead that has businesses around the world on edge.”