President-elect Donald Trump quickly promised new tariffs on imports from China, Mexico and Canada.
However, if his threats come to fruition, they could potentially distort inflation and investment and disrupt the broader economic cycle.
The new import tariffs could reverse some of the hard-won progress on inflation that the Federal Reserve is still struggling to contain. Meanwhile, the cost of importing goods from the country’s neighbors to the north and south may also increase the trade deficit, weighing on investment elsewhere.
In an effort to fulfill campaign promises to secure borders and create favorable trade conditions — Trump said the tariffs are aimed at curbing what he described as an “invasion” of drugs and migrants into the U.S. — Trump risks exacerbating the inflationary problems that have turned voters around the globe against incumbents. and helped catapult him to power.
Chief among the side effects of imposing tariffs is the way the costs could be passed on to American consumers.
Economists at Pantheon Macroeconomics wrote in research on Tuesday that in a simple, static analysis, total prices for U.S. goods imports would jump 8% if Trump imposed a 25% tariff on all goods imported from Canada and Mexico and another 10%. % tariffs on those from China.
That would lift overall PCE by 0.9%, bringing Wednesday’s figure of a 2.3% annual jump in prices back above 3%.
The analysis comes even as new data showed on Wednesday that the Federal Reserve’s preferred gauge of inflation — the core PCE measure that strips out food and energy costs — was moving “sideways,” raising questions about whether progress toward the central bank’s inflation target on stopped at the 2% level.
However, the Pantheon team led by Samuel Tombs added that the increase in consumer prices will be less than the rough calculation suggests. A number of mitigating factors would lessen the blow to Americans, including changing trade flows and retailers absorbing some of the increased costs.
But the tariffs could have another negative impact as companies figure out how to respond to Trump’s incoming orders.
“Threatened tariffs on Canada and Mexico will incentivize U.S. importers to pre-stock imports and stockpile, regardless of whether tariffs are implemented,” Barclays economists led by Pooja Sriram wrote in a note on Tuesday.
“25% tariffs could intensify this pull-through effect, leading to an even stronger increase in imports in late 2024 and early 2025, widening the trade deficit.”