In a considerably more forceful use of his preferred economic weapon than he did in his first term, President Donald Trump is about to impose massive tariffs on America’s three largest trading partners.
The impending import charges on China, Canada, and Mexico will put Trump’s unconventional use of tariffs—dubbed “the greatest thing ever invented”—to the test.
It’s a huge risk, perhaps even greater than any economic measure Trump has implemented in his more than four years in office. Additionally, this approach has the potential to upset the economy and cost of living, which are the two issues that many voters worry about the most.
However, there is a significant chance that Trump’s tariffs may backfire, raising already high grocery store prices, upending the already unstable stock market, or eliminating employment in a full-scale trade war.
In a phone interview with CNN, Mary Lovely, a senior scholar at the Peterson Institute for International Economics, said, “This might be the biggest own-goal yet.” This is a big risk. It will inevitably slow down the economy and raise inflation.
Going one step further, the Wall Street Journal published a damning opinion piece on Saturday headed “The Dumbest Trade War in History.”
Trump’s defence of a “economic assault” on Canada and Mexico, according to the opinion piece, “makes no sense,” and it could backfire.
An entirely other planet
Trump sees tariffs as an almost magical negotiating instrument that can be used to exert pressure on allies and friends.
He has maintained that in order to handle important issues like the trade deficit, illegal immigration, and the flow of illegal drugs, tariffs are required.
Trump and his followers frequently point out—rightly—that tariffs did not result in serious inflation during his first term.
However, those tariffs were different and were implemented in a different world at a different period.
On Saturday, Trump initiated taxes on $1.4 trillion worth of imports. According to calculations from the Tax Foundation, that is more than three times the $380 billion in foreign goods that were subject to tariffs during Trump’s first term.
There wasn’t much of an inflation issue during Trump’s first term.
At the grocery store, the car dealership, and practically everywhere else, life is so much more expensive these days. Federal Reserve officials, investors, and consumers are now far more sensitive to even slight price hikes.
Why would you “burn down your own house?”
Although the White House has maintained that Trump’s tariffs won’t have a negative impact on the US economy, some trade experts and economists are extremely alarmed since they target Canada and Mexico, the US’s nearest neighbours.
Trump promised to impose tariffs on Canada and Mexico during his first term, but he never followed through. His advisors talked him out of such actions.
In the highly integrated North American economy, imposing sweeping tariffs on Canada and Mexico may disrupt supply chains and raise costs.
The US depends on the North American economic powerhouse, and imposing tariffs of up to 25% on our closest trading partners runs the risk of destroying it. What would motivate you to set fire to your own home? said Christine McDaniel, a senior research scholar at the Mercatus Centre at George Mason University and a former trade official in President George W. Bush’s administration.
This is particularly true in the automotive sector, as parts frequently travel across borders several times before a vehicle is delivered to the dealership. According to Wolfe Research, tariffs may raise the cost of a typical car sold in the US by $3,000 per year.
Prices at grocery stores are at stake
Since Canada is the biggest foreign supplier of oil, the oil sector has begged the White House to exempt crude from the taxes. Analysts have cautioned that tariffs may raise the cost of petrol in the Midwest, the Great Lakes and the Rockies. For this reason, the White House reduced Canadian energy tariffs from a whole 25% to 10%.
One of the main issues that affected voters in the most recent election was the cost of groceries. However, Canada leads the world in cereals, livestock/meats, sugar/tropical products, and fruit and vegetables, whereas Mexico is America’s biggest foreign supplier of these goods.
Lovely expressed her “extreme” confidence that the US tariffs will result in higher pricing for customers, particularly for building supplies and groceries. She pointed out that part of the price impact might be mitigated, but not all of it, by changes in currency values.
“Prices must go up,” Lovely stated. “Even though he wants to persuade us that this is true, there is no way you can just levy this tax and then, poof, this burden disappears.”
Price increases brought on the tariffs won’t occur right away. Alternatively, they can occur gradually as the effects spread through intricate supply channels.
Lovely remarked, “It’s not like everyone will mark up their shelves tomorrow and then it’s done.” There will be a gradual pass-through to prices. It will be at Home Depot one week and the grocery store the next.
The issue is that retaliatory tariffs and increased input costs might affect consumer and company spending, as well as worry investors and Fed officials.
Gregory Daco, the senior economist at EY, forecasts that Trump’s tariffs on China, Canada, and Mexico, as well as the retaliatory tariffs imposed by those nations, may reduce US GDP growth by 1.5 percentage points in 2025 and another 2.1 percentage points in 2026.
In an analysis released on Friday, Daco stated that “severe tariff increases against US trading partners could create a stagflationary shock—a negative economic hit combined with an inflationary impulse—while also triggering financial market volatility.”
“Tampering with fire”
The Fed will react with a major wildcard.
Tariffs could compel the US central bank to further postpone interest rate decreases, even though Fed Chair Jerome Powell and his colleagues could be ready to ignore a one-time price impact.
If tariffs have any effect at all on consumer psychology, that will be the true key for Fed officials.
In the new research, Daco stated, “The Fed may feel pressured to keep rates restrictive for longer if tariffs drive inflation expectations higher, tightening financial conditions and weighing on growth momentum.”
Naturally, it’s still too early to predict exactly how this will all play out. Among the various factors are the responses of consumers and intricate supplier systems.
A last-minute compromise could be reached before the tariffs actually cause harm.
Nevertheless, raising duties by this much on such a broad range of products is a dangerous tactic that not even Trump attempted during his first term.
According to Joe Brusuelas, chief economist of RSM, “the administration is playing with fire.”
