President-elect Donald Trump has vowed to immediately impose new tariffs on imports from China, Mexico and Canada.
But his threats, if carried out, could disrupt inflation and investment, disrupting the broader economic cycle.
New tariffs on imports could reverse some of the hard-won inflationary gains the Federal Reserve is still struggling to maintain. Meanwhile, imports of goods from neighboring countries to the north and south could become more expensive, widening the trade deficit and putting pressure on investment in other regions.
Seeking to fulfill campaign promises to secure the border and establish favorable trade terms, President Trump said these tariffs are aimed at curbing the “infiltration” of drugs and immigrants into the United States. . President Trump helped propel him to power against incumbents around the world who risk exacerbating the inflation problem that has turned voters off.
President-elect Donald Trump speaks to the House Republican Conference on November 13, 2024 in Washington. (Alison Robert/Pool, Associated Press, File) · ASSOCIATED PRESS
The most important ripple effect of imposing tariffs is how those costs are passed on to U.S. consumers.
Economists at Pantheon Macroeconomics wrote in a research note Tuesday that a simple, static analysis shows that President Trump would impose a 25% tariff on all manufactured goods imports from Canada and Mexico, plus an additional 10% tariff. If the tax were imposed, the price of all imported U.S. goods would jump 8%, he wrote. Imported goods from China are subject to a % customs duty.
As a result, the headline PCE will rise by 0.9%, returning the annual rate of inflation forecast of 2.3% as of Wednesday to above 3%.
The analysis also pointed to new data on Wednesday showing that the Federal Reserve’s preferred measure of inflation (core PCE, which subtracts food and energy costs) remains “flat” and the central bank’s 2% inflation target. The announcement comes after it was shown that there are concerns that progress towards achieving this goal has stalled.
But the Pantheon team, led by Samuel Tombs, added that the lift in consumer prices would be smaller than its rough calculations suggest. A variety of mitigating factors will lessen the blow to Americans, including changes in trade flows and retailers absorbing some of the increased costs.
But the tariffs could have other negative consequences as companies figure out how to respond to President Trump’s future orders.
“The threat of tariffs on Canada and Mexico, regardless of whether tariffs are implemented, may prompt U.S. importers to bring forward imports and build up inventories,” Barclays economists led by Pooja Sriram wrote in a research note Tuesday. I will encourage it,” he said.
“A 25% tariff could strengthen this boost, leading to a further surge in imports in late 2024 and early 2025, thereby widening the trade deficit.”
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The gamesmanship and uncertainty that could surround even discussions of potential tariffs could also further worsen the economic outlook.
“Temporary and uncertain tariffs of this nature discourage investment, as companies wait for more information about the long-term viability of prevailing supply chains and their alternatives before committing to capital investments. “Creates a natural incentive to delay,” Barclays added.
Of course, many observers expect President Trump’s tariff threats to bark more than they bite. Meanwhile, Barclays wrote: “Our general policy is that tariffs on Mexico and Canada are likely not ultimately implemented.”
But the incentive for companies to try to get ahead of future cost increases, even if those costs turn out to be hypothetical, could impede broader spending plans at both the corporate and government levels.
“[These]threats are an extremely effective tool, at least for countries whose exports to the United States amount to more than 20% of their GDP,” Capital Economics’ Paul Ashworth said in a note to clients on Wednesday. ” he wrote. “There is no doubt that allies will be targeted just as much as traditional adversaries, and there will be more threats.”
Hamza Shaban is a reporter for Yahoo Finance, covering markets and economics. Follow Hamza on X @hshaban.
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