Trump’s Tariffs are Finally, Almost, Nearly Here
Just six years after Trump 1.0 signed a new trade agreement with Mexico and Canada, Trump 2.0 is imposing tariffs on goods from them.
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They are a wrist slap compared with those of his hero, William McKinley, who in 1890 slapped duties averaging nearly 50% on all US imports, but President Donald Trump’s long-promised tariffs will finally kick in at 12:01 a.m. on Tuesday.
Just six years after Trump 1.0 signed a new trade agreement with the country’s North American neighbors, Trump 2.0 is imposing a 25% tariff on goods from Mexico and Canada (though just 10% on energy imports), as well as an additional 10% tariff on goods from China. On the eve of what The Wall Street Journal’s editorial board has dubbed “The Dumbest Trade War in History,” here’s what we know.
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Economists say a trade war could be economically ruinous for Canada and Mexico. “Since exports to the US account for around 20% of their GDP, today’s tariffs could plunge both the Canadian and Mexican economies into recession later this year,” Paul Ashworth, Chief North American Economist at Capital Economics, wrote Sunday. Unsurprisingly, Canadian Prime Minister Justin Trudeau said Canada will begin phasing in retaliatory 25% tariffs on $106 billion of US goods. Mexico has similarly promised retaliation, though has yet to share specifics. The European Union, which Trump has threatened with tariffs, says it would retaliate as well.
Meanwhile, US consumers are likely to feel a pinch. According to Yale University’s Budget Lab, the tariffs will likely result in a $1,200 loss in annual purchasing power for the average US household; ING estimates it could be as high as $3,242 for a family of four. You may want to stock up on avocados. Goldman Sachs economists estimate the tariffs could cause a 0.7% increase in core inflation and a 0.4% hit to US GDP. Barclays analysts say S&P 500 company earnings could take a 2.8% hit this year.
On the flip side, one thing seems for sure: A tariff-off is likely to strengthen the US dollar:
- Here’s how the math goes: Tariffs will likely fuel inflationary pressures in the US, keeping interest rates high, and they will likely decrease US demand for costly imports, dragging down foreign currencies and economies overall and thus furthering the USD’s status as a safe haven for investors.
- In fact, investors have been pricing in the dollar-strengething effects of tariffs since Trump’s election; the Bloomberg Dollar Spot Index is up nearly 1% since mid-November, and hedge funds have been loading up on long-dollar bets.
Trump has said tariffs are a means to reshoring American manufacturing. However, most experts say a strong USD is antithetical to kickstarting domestic manufacturing. In a letter to his partners at Key Square sent almost a year ago to this day, now-Treasury Secretary Scott Bessent said exactly as much: “Tariffs are inflationary and would strengthen the dollar — hardly a good starting point for a US industrial renaissance. Weakening the dollar early in his second administration would make US manufacturing competitive.”
Chekhov’s Tariff Gun: In the same letter, Bessent said tariffs are a big stick at the negotiating table: “The tariff gun will always be loaded and on the table but rarely discharged.” At least some still think the tariff gun will get holstered sooner rather than later. In a note Sunday, Goldman Sachs economists wrote “a last-minute compromise cannot be completely ruled out,” and investors should “believe US tariffs on Mexico and Canada will be short-lived.”