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The worst-case scenario for a looming trade war is brewing, which would trigger anything from a relatively mild recession to something on the scale of the 2008 financial crisis, according to a Deutsche Bank analysis.
While the most likely scenario is something considerably more benign, as in more measured responses from U.S. trading partners to the tariffs, Deutsche's economists list a series of events indicating that a full-blown trade war has become more likely. The principal combatants would be the U.S., China, Mexico and Canada, but the ramifications would be widespread.
"While our base case remains that US protectionist actions will be limited enough in scope not to invite economically significant retaliation or disruption of markets and macroeconomic activity, recent events have raised the odds of more adverse scenarios," Peter Hooper, the bank's chief economist, wrote in a 28-page breakdown of various scenarios.
There are four items in particular that raised the likelihood of a more adverse outcome: The tariffs President Donald Trump recently announced on imported steel and aluminum; National Economic Council head Gary Cohn's resignation over the levies; Trump's tweet that "trade wars are good and easy to win "; and White House saber rattling that more tariffs could be coming, this time on China.
When Trump ran for office in 2016, economists listed a potential trade war as the biggest risks posed by the Republican's victory.
Now that the president is heading down the tariff path, fears are increasing that a global commerce battle could be at hand.
"Protectionist policies can in theory succeed in gaining one country a larger slice of the global pie, but they inevitably invite retaliation that results in a substantial shrinking of the global pie, making all countries worse off," Hooper wrote. "A basic misunderstanding of this principle, and a failure of the beneficiaries of free and open trade to compensate the losers could doom us to repeat the errors of the past."
Essentially, the biggest fears come from the possible inflationary impacts of a trade war. Should Trump continue to deem other nations' levies as a threat to national security and subsequently expand the tariffs, that would invite reciprocal moves.
From there, inflationary pressures kick in as the added cost to imported goods push up consumer prices, slow down consumption and derail economic momentum.
The most glaring case is the Smoot-Hawley tariffs in 1930 which accelerated the damage from the Great Depression. More recent examples of failed tariffs came from Presidents George W. Bush and Barack Obama.
Hooper and his team at Deutsche worry that the U.S. will slap China with tariffs of some 45 percent on imports in retaliation for intellectual property theft, while hitting Mexico and Canada with 25 percent duties if they don't renegotiate NAFTA.
"The severity of the impact results from a variety of channels: a sharp decline in trade flows, which disrupts supply chains; weaker consumer spending driven by a decline in disposable income as inflation rises; a tightening of financial conditions as equities decline, credit spreads rise, and volatility spikes," the report said.
A "more extreme scenario" of respective 45 percent and 35 percent tariffs on China and Mexico triggers "a mild recession," while escalating tensions with China are worse globally: "The shock under this trade war heavy scenario is comparable to the global financial crisis in 2008," the report said.
At this point, the worst-case outcome is not anticipated. Deutsche still forecasts 2.9 percent U.S. GDP growth in 2018 and is figuring that no nation will push for a full-blown trade war.
Morgan Stanley also is out with a trade-war analysis. It, too, expressed fears over escalation, though it did not mention a recession possibility.
"While the initial response from trade partners [to the Trump tariffs] has been measured and has helped to prevent an exacerbation of trade frictions, the risk of trade frictions broadening out remains high," the bank's economists wrote.
Morgan Stanley sets out a three-pronged potential scenario that is more benign than the Deutsche outlook: An agreement to cut the U.S.-China trade deficit by $100 billion, "targeted" use of Section 301 provisions that give the president and trade representative the authority to act against unfair trade, and, finally, "more aggressive" use of 301 authority that would result in 20 percent tariffs against China.
"This would have the strongest impact," according to Morgan Stanley's chief economist, Ellen Zentner, with the result shaving 1 percentage point off annual GDP growth both for China and the U.S.
WATCH: Credit Suisse doubts that a trade war is coming.