President Donald Trump announced on Thursday that he will sign an order to impose sweeping reciprocal tariffs on U.S. trading partners. This move comes as inflation rises, with the consumer price index now running at an annual rate of 3% since November’s election. Trump has attributed part of this inflationary pressure to trade imbalances and aims to address these through increased tariffs.
The main target of these new tariffs is China, which faces an additional 10% levy due to its role in the production of the opioid fentanyl. Furthermore, Trump has prepared tariffs on Canada and Mexico, the two largest trading partners of the United States. These tariffs, suspended for 30 days, could take effect in March. Analysts warn that such actions could exacerbate inflationary pressures, acting as a tax increase on U.S. consumers.
The White House argues that matching import taxes to those of other countries would enhance the fairness of trade. However, economic analysts, including those from Wells Fargo, express concerns about the potential impact on economic growth this year. In a report released Thursday, they noted:
"Tariffs impart a modest stagflationary shock to an economy" – Analysts at Wells Fargo
Despite these concerns, Trump's team acknowledges the likelihood of some financial hardship resulting from the tariffs. They are making a political bet that voters can withstand higher inflation levels. The current administration hopes that these measures, alongside the possible extension and expansion of Trump's 2017 tax cuts, will ultimately benefit the economy.
However, international repercussions are already unfolding. The European Union, Canada, and Mexico have prepared countermeasures to retaliate against Trump's tariffs, potentially inflicting economic pain on the United States. China has already implemented its own tariffs on American energy products, agricultural machinery, and large-engine autos. Additionally, China has initiated an antitrust investigation into Google, further escalating tensions.
In a related development, Trump removed the exemptions from his 2018 steel and aluminum tariffs earlier this week. Yet, he has not clarified how he interprets "reciprocal" in this context or whether his order solely pertains to matching tariffs or extends to other foreign taxes.
The backdrop for these developments includes a history of price spikes in 2021 and 2022 that significantly affected the popularity of then-President Joe Biden. Trump appears to be positioning his policies as a corrective measure to these past economic woes.
