On the day of his inauguration, President Trump threatened steep new tariffs against key U.S. trading partners. Now he may be primed to deliver.
Mr. Trump said Jan. 20 that he could announce 25% tariffs against Canada and Mexico as soon as Feb. 1, while China could face a 10% duty. Economists have warned that stiff tariffs could reawaken inflation on a range of consumer goods and slow economic growth. Here’s what experts have to say.
Why is Trump threatening to hit countries with tariffs?
Mr. Trump has threatened tariffs against multiple nations for a range of reasons. He said he is specifically targeting Canada, Mexico and China with tariffs to compel them to take action to halt the flow of undocumented immigrants and illicit drugs into the U.S.
Before Mr. Trump returned to power, he also had threatened tariffs of up to 60% on Chinese goods imported into the U.S., a measure experts say is intended to advance American interests in negotiating better trade terms with Beijing, as well as throttle the illegal entry of fentanyl into the country.
In a show of how his administration uses tariff threats to pressure countries on other issues, Mr. Trump last week proposed potential 25% levies against Colombia unless it agreed to receive deportations of unauthorized immigrants. Colombia ultimately agreed to receive the immigrants, and the tariffs were withheld.
Colombia’s about-face suggests that Canada and Mexico could also reach agreement with the U.S. and avert a painful trade war. To that end, Howard Lutnick, Mr. Trump’s nominee for commerce secretary, said at his confirmation hearing Wednesday that Canada and Mexico could avoid tariffs by closing their borders to fentanyl.
“As far as I know, they are acting swiftly, and if they execute it, there will be no tariff,” Lutnick told senators.
Even so, Mr. Trump’s brandishing of potential tariffs — even if they are never imposed — highlights his willingness to use tough trade measures to punish even the country’s closest allies unless they make concessions.
“As we have previously noted, trade policy will be transactional over the next four years with protectionist measures used to extort trade, immigration and other political concessions,” EY-Parthenon chief economist Gregory Daco said in a research note.
What exactly is Trump planning?
Rather than targeting individual countries, the Trump administration could also opt to impose a blanket tariff on a range of countries in Asia, South America, Europe and other regions, experts say. But it remains unclear what tariffs could be deployed, how they might be structured and the possible timeline for deploying them.
“I think we have to proceed on the assumption that some kinds of tariffs are going to be imposed on the United States’ major trading partners,” Brett House, professor of economics at Columbia Business School, told CBS MoneyWatch. “In the end, there is a lot that gets announced by the president on social media that does not come to pass. I don’t take it as bluffing, so much as a storm of possibilities, and it’s hard to tell which bit of that storm is going to be pursued most aggressively, and most immediately.”
What’s clear, by contrast, is that the new administration is picking up where Mr. Trump left off in his first term in using trade policy as an instrument of both economic and foreign policy. That is likely to lead to a period of uncertainty and volatility, said John Lash, group vice president of product strategy at supply-chain software firm E2open.
“A lot of alternatives are still possible,” Daco told CBS MoneyWatch in an interview. “We don’t know, but game theory would suggest the president would implement tariffs in some form against Mexico and Canada — not blanket tariffs, but on a select number of imports from both nations… because otherwise his bluff is going to be called.”
On how soon any tariffs could take effect, Daco notes that Mr. Trump could move quickly by claiming authority under a 1977 law known as the International Emergency Economic Powers Act.
“When he said he’ll impose tariffs on Feb. 1, it is still an open question as to what means would be used. Do you want to implement tariffs immediately, as threatened against Colombia over the weekend, or are you threatening with a deadline to obtain concessions?,” Daco said.
Would the U.S. face retaliation?
Almost certainly, economists say. If Trump officials move ahead with tariffs on its northern neighbor, “We anticipate Canada would then respond in kind by also implementing a 25% across-the-board tariff on U.S. imports,” Satyam Panday, chief U.S. and Canada economist with S&P Global Ratings, said in an email.
Elijah Oliveros-Rosen, chief emerging markets economist at S&P Global Ratings, predicted Mexico also would fire back with targeted tariffs. “In the case of Mexico, we think it’s very unlikely the government would place tariffs on U.S.-manufactured imports, given most are intermediate goods eventually exported to the U.S. Therefore, we expect the Mexican government could impose tariffs on agricultural and food imports, but not manufacturing.”
Mr. Trump has said that strengthening the U.S.’ stance on trade issues will help protect American workers and lead to a resurgence of domestic manufacturing. Yet such policies could come at the cost of damaging critical relationships with other nations around the world, said Douglas Irwin, a U.S. trade policy expert and professor of economics at Dartmouth College.
What is the risk to American consumers?
Irwin and other economists say tariffs are all but certain to lead to higher prices for U.S. consumers. That’s because companies that end up on the hook typically pass added costs along to consumers in order to protect their bottom lines.
“The notion this this administration has been adhering to is somewhat surprising — the idea that if you implement gradual tariffs over time, such as in 5% increments, that these are less inflationary,” Daco told CBS MoneyWatch. “This idea is misguided, because if you have incremental price increases month after month, if anything that leads to higher inflation expectations. It leads to higher inflation on a month-to-month basis.”
If Mr. Trump’s tariffs are implemented in full, including a universal 10% tax on all goods, consumer price inflation could rise by between 3% and 4%, according to an analysis this week from Capital Economics. To be sure, analysts with the investment advisory firm expect Mr. Trump to stop short of imposing a blanket tariff and instead pick his targets.
“Nevertheless, imposing any of these suggested tariffs would generate a rebound in consumer price inflation this year, taking it further above target and making it harder for the Fed to resume loosening monetary policy,” the firm said.
