President Donald Trump is about to reach the three largest commercial partners in the United States with high tariffs – a much more aggressive use of his favorite economic weapon than anything he has done during his first term.
Imminent import rates on Mexico, Canada and China will be a great test to Trump’s unorthodox use of tariffs, which he has described as “the best thing ever invented.”
It is a huge bet, probably larger than any other economic policy that Trump has adopted for his four years in the White House. And this strategy has the potential to change what many voters are more concerned: the economy and the cost of living.
But Trump’s rates pose a great risk: it can be shot by the culatric, increasing the already high consumer prices in supermarkets, shaking the unstable stock market or eliminating jobs in a total trade war.
“This can be the biggest self-collateral ever,” says Mary Lovely, senior member of the Peterson Institute for International Economics, in an interview with CNN. “This is a great risk. It is a revenue to slow the economy and increase inflation. ”
The Wall Street Journal went further, publishing an opinion article entitled :.
The article argues that Trump’s justification for a “economic attack” to Canada and Mexico “makes no sense” and warns that the strategy can end up in disaster.
A very different world
Trump sees tariffs as an almost magical negotiation tool, a powerful way to gain influence on friends and allies.
He argued that rates are needed to resolve major concerns, including commercial deficit, illegal immigration and illicit drug flow.
Trump and his supporters often emphasize, rightly, that tariffs during their first term did not cause problematic inflation.
But these were different tariffs, applied in a very different world and at a very different time.
On Saturday, Trump imposed rates on $ 1.4 billion of imported goods. This amount is more than triple from the $ 380 billion of foreign goods that were targeted during Trump’s first term, according to estimates of Tax Foundation.
During Trump’s first term, inflation was not really a problem.
Today, the cost of living is much more expensive at the supermarket, the car stand and almost everywhere. Consumers, investors and federal reserve guardians are now much more sensitive to price increases, even moderate.
Why “pour your own house fire”?
The White House has argued that Trump’s tariffs will not cause problems with the US economy, but some trade economists and trade experts are deeply concerned with the fact that these rates aim to neighbors closest to the United States – Canada and Mexico .
During his first term, Trump threatened, but never applied tariffs to Canada and Mexico. Was dissuaded by his counselors.
The imposition of tariffs on Canada and Mexico could cause chaos in the US economy, which is closely interconnected, leading to an increase in prices.
“The imposition of such high rates as 25% on our nearest business partners risks decimating US economic power, on which the US depend. Because would we want to set fire to our own home? ”Asked Christine McDaniel, former commercial manager of the administration of President George W. Bush, who is currently senior researcher at George Mason University Center.
This is especially true in the automotive industry, where the pieces often cross the border several times before a car reaches the dealer. Wolfe Research has estimated that the price of a typical car sold in the United States could increase by $ 3,000 due to customs rights.
Prices in supermarkets at risk
The oil industry has appealed to the White House to protect the raw from tariffs, as Canada is the largest foreign oil source. Analysts warned that tariffs could increase gasoline prices in large lakes, Midwest and rocky mountains. This is why the White House reduced channel energy rates to 10% instead of 25% total.
Eating goods prices are one of the main problems that weighed on voters in the last elections. But Mexico is the largest foreign source of US fruits and vegetables, while Canada is number 1 in cereals, cattle/meat and sugar/tropical products.
Mary Lovely said she was “very much” confident that US tariffs will cause consumer prices to increase – especially food products and building materials. The commissioner pointed out that the changes in the value of the currencies may mitigate part, but not all the impact on prices.
“Prices have to increase,” says Lovely. “You can’t simply charge this tax and suddenly this charge disappears – although that’s what [Trump] He wants to convince us that it is true. ”
Price increases caused by tariffs will not happen immediately. Instead, they can occur gradually as the impact flows through complex supply chains.
“It’s not that everyone will increase prices in supermarkets tomorrow and then everything is resolved,” says Lovely. “Let’s watch a slow pricing repercussion. One week it will be at the grocery store, in another it will be at home depot. ”
The problem is that the highest costs of production factors, along with retaliation tariffs, can undermine the expenses of companies and consumers – and alarm investors and those responsible for the Federal Reserve.
Trump’s tariffs on Mexico, Canada and China, along with the retaliation tariffs of these countries, may eliminate 1.5 percentage points of US Gross Domestic Product (GDP) points in 2025 and more percentage points more In 2026, according to EY chief economist estimates, Gregory Daco.
“The accentuated increases in tariffs against US business partners can create a stagflactionary shock – a negative economic impact combined with an inflationary impulse – while triggering the volatility of financial markets,” Daco wrote in a report published on Friday.
“Play with the fire”
The reaction of the federal reserve is a major factor of uncertainty.
Although Federal Reserve President Jerome Powell, and his team may be willing to ignore a punctual impact on prices, tariffs may force the US Central Bank to further postpone interest rates cuts.
The real key to the Fed responsible will be the way tariffs change consumer psychology, if they change.
“If tariffs increase inflation expectations, the Fed may feel pressured to maintain restrictive rates longer, restricting financial conditions and weighing on growth dynamics,” Daco explains in the same report.
Of course it is still too early to say exactly how all this will unfold. There are many variables, including the reaction of complex supply chains and consumers.
It is perfectly possible to reach a last minute agreement before the rates cause real damage.
Still, increasing so much fares about such a vast set of goods is a risky strategy that not even Trump has attempted in his first term.
“Administration is playing with the fire,” says Joe Brusuelas, RSM’s chief economist.
