President-elect Donald Trump has been quick to promise new tariffs on imports from China, Mexico, and Canada.
But his threats, if carried out, potentially threaten to upset inflation and investment and disrupt the broader economic cycle.
New duties on imports could reverse some of the hard-won progress on inflation that the Federal Reserve is still struggling to maintain. Meanwhile, making it more expensive to import goods from the nation’s neighbors to the north and south may also widen the trade deficit, weighing on investments elsewhere.
In seeking to deliver campaign promises to secure the border and establish favorable trade conditions — Trump said these tariffs are aimed at curbing what he described as an “invasion” of drugs and migrants into the US — Trump risks worsening the inflation woes that turned voters across the globe against incumbents and helped catapult him to power.
Chief among the knock-on effects of imposing tariffs is how the costs might be passed on to US consumers.
In a research note Tuesday, economists at Pantheon Macroeconomics wrote that, in a simple, static analysis, overall prices for US goods imports would jump by 8% if Trump imposes a 25% tariff on all goods imports from Canada and Mexico and an extra 10% tariff on those from China.
This would push headline PCE up by 0.9%, taking Wednesday’s reading of a 2.3% annual jump in prices back above 3%.
The analysis also comes as new data on Wednesday showed the Federal Reserve’s preferred inflation gauge — core PCE, which strips out food and energy costs — moving “sideways,” and raising questions over whether progress toward the central bank’s 2% inflation goal has stalled.
Pantheon’s team, led by Samuel Tombs, added, however, that the boost in consumer prices would be smaller than that crude calculation suggests. A range of mitigating factors would lessen the blow to Americans, including a change in trade flows and retailers absorbing some of the increased costs.
But tariffs may have another negative effect as companies figure out how to react to Trump’s coming orders.
“The threatened tariffs on Canada and Mexico will motivate US importers to front-load imports and accumulate inventories, regardless of whether the tariffs are implemented,” Barclays economists led by Pooja Sriram wrote in a research note on Tuesday.
“The 25% tariffs could intensify this pull-forward effect, leading to an even stronger surge in imports in late 2024 and early 2025, thereby widening the trade deficit.”
