UBS On-Air: Paul Donovan Daily Audio '“Temu tax” time'
Per the full note , UBS Chief Economist Paul Donovan argues the new US 'Temu tax' — a 120% tariff or $100 flat fee on low-value Chinese imports effective May 2 — is a direct inflationary tax on US consumers, not a foreign cost. Donovan contends this will not appear in official CPI data, but will fuel the narrative that President Trump's trade policies are raising prices, increasing pressure for a trade deal. Markets may interpret recent EU and Chinese overtures as positive, but the uncertainty has already damaged US economic growth, limiting upside from any potential deal. No internal coverage consensus or upcoming calendar events were identified for this commentary.
What the desk is arguing
UBS Chief Economist Paul Donovan argues that the new US 'Temu tax,' effective May 2, is a direct price increase for US consumers, who must now pay either 120% of the value or a flat $100 per delivery on low-cost imports from China. The deduction is that tariffs are inflationary, and the price is borne by US consumers rather than foreign exporters. Donovan stresses that while the tax likely won't appear in official CPI data — Temu prices are rarely captured in the statistics — it will reinforce the perception that Trump policies are raising prices.
The desk points to Temu's status as the most downloaded app in the US last year, underscoring the breadth of impact. The note suggests that this visible inflationary effect may lead consumers to blame all price increases on Trump's trade taxes, amplifying political pressure for a deal. Donovan cites China's suggestions of US outreach and EU Trade Commissioner's positive noises as evidence of potential agreements, which markets will likely view as reducing tail risk.
The alternative read — that tariffs are a negotiating tool with limited real economic impact — is implicitly rejected by Donovan's emphasis on the direct cost to consumers and the structural damage from uncertainty.
Key takeaways
- 01The US 'Temu tax' is a direct tax on US consumers, estimated at 120% or $100 per shipment, effective May 2, and is inflationary.
- 02UBS warns the tax may not affect official CPI but will reinforce the narrative that trade policy is raising prices, pressuring the administration for a deal.
- 03Market optimism from China and EU trade deal signals is tempered by the existing economic damage from uncertainty.
Market implications
With no internal coverage consensus or upcoming high-impact events, the immediate market implications center on risk sentiment: if trade deal optimism builds, risk-on currencies like EUR may gain; conversely, any deterioration could boost safe havens like USD.
Risks to this view
The call is invalidated if official CPI data unexpectedly captures Temu-like prices, reducing the narrative disconnect, or if the administration resists a deal, amplifying uncertainty further. A sharp reversal in tariff enforcement would also undermine the inflation thesis.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 2nd of May. The U.S.
Taemu tax will come into force at midnight tonight, whereby U.S. consumers have to pay the U.S. government for the privilege of buying lower-quality, low-cost products direct from China. This is going to be a direct price increase for all U.S. consumers, who will either have to pay 120% of the value or a flat $100 per delivery. It reinforces the fact that tariffs are inflationary and the higher prices are paid by U.S. consumers, not by foreigners.
Taemu, the online retailer, was the most popular app downloaded in the United States last year. The tax may not show up in the U.S. official consumer price inflation data. It's very doubtful that purchases from Taemu are captured in these statistics.
What it is likely to do is reinforce the narrative that U.S. President Trump's policies are raising prices and there is also a chance that this visible inflationary effect from tariffs will encourage people to blame all price increases on the Trump trade taxes. In this environment, the pressure on the Trump administration to do a trade deal, any trade deal, is likely to increase.
China's government has suggested that the United States has been reaching out for a trade deal and the EU Trade Commissioner has made positive noises about the prospect of some kind of agreement being reached. This will be taken as good news by financial markets or, at the very least, as reducing the chances of really bad news on trade. However, it is worth remembering that the damage of uncertainty has already hurt the U.S. economy and so there are limits to how much growth can be salvaged if the United States retreats still further from its tariff stance.
While sentiment surveys should very rarely be taken seriously, and survey respondents generally have a political agenda that they wish to pursue, every single published comment in the ISM Manufacturing Sentiment Survey commented on the tariff policy, with the consequences of uncertainty and insecurity being highlighted. Today's labour market data from the States is very unlikely to reflect the growth consequences of the uncertainty in trade taxes. The rough order of impact of tariffs is 1.
Sentiment is hit with a partisan bias. 2. Jobs directly associated with trade – ports, trucking and so on – are declared temporarily unemployed. Other firms stop hiring but do not fire workers. 3.
Inflation goes up, reducing consumer spending power. 4. Weaker demand affects business bankruptcy rates and overall employment. At the moment, the U.S. is hovering between stages 1 and 2.
Trump donor Musk's government layoffs will have a limited impact on the headline data and the resulting delays and inefficiencies in the government-sector interactions will take some time to impact private-sector employment rates. The market consensus is for a stable unemployment rate today. Average hourly earnings, which are not the same thing as wages, are likely to be growing a little stronger than wage growth at the moment.
However, the expected growth of less than 4% year-over-year is below where the tariff-impacted inflation rate is likely to end up. Euro area initial April consumer price inflation data is due. This is not going to be a huge focus for markets as investors are anticipating disinflationary effects arising from the global situation.
The move in energy prices is a foretaste of that. That's all for today. Have a good day.
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