President-elect Donald Trump’s promise to impose new tariffs on imports from China, Mexico, and Canada could have significant economic consequences, potentially disrupting inflation, investment, and the broader economic cycle.
If implemented, the new tariffs might reverse the Federal Reserve’s hard-won progress in controlling inflation. Raising the cost of imports from the US’s neighboring countries could also exacerbate the trade deficit, putting downward pressure on investments. While Trump claims these tariffs are intended to address issues like the “invasion” of drugs and migrants, they could worsen inflation, which has already been a key factor in undermining trust in political incumbents.
One of the major side effects of tariffs is the increased cost for US consumers. Economists at Pantheon Macroeconomics estimate that if Trump imposes a 25% tariff on imports from Canada and Mexico, and an additional 10% on goods from China, the overall price of US goods imports could rise by 8%. This would likely push the Personal Consumption Expenditures (PCE) price index back above 3%, well above the Federal Reserve’s 2% inflation target. Recent data showed that the core PCE inflation gauge, which excludes food and energy costs, has been moving “sideways,” raising concerns about stalled progress towards the central bank’s goal.
Although Pantheon economists acknowledge that various factors could mitigate the impact, including changes in trade flows and retailers absorbing some of the costs, the overall effect on consumer prices would still be significant. Additionally, businesses may react to these tariff threats by adjusting their strategies.
US importers could accelerate imports to avoid the impending tariffs, causing a surge in imports toward the end of 2024 and into early 2025, further widening the trade deficit. Barclays economists noted that the uncertainty surrounding these tariffs could also lead to businesses postponing investments as they wait for clearer guidance on the future of supply chains and tariffs. This delay in investment could harm both corporate and national economic prospects.
Despite these concerns, some analysts believe that Trump’s tariff threats may prove to be more bluster than reality. Barclays suggests that tariffs on Mexico and Canada may not ultimately be enforced. However, the mere threat of tariffs can still have a significant impact. As noted by Capital Economics’ Paul Ashworth, these threats are a highly effective tool, particularly against countries where exports to the US make up a significant portion of their GDP. This dynamic could lead to further uncertainty and impact both business investments and broader economic activity.
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