Starting today, imports from Canada, Mexico, and China are going to be hit with tariffs of up to 25% because of Donald Trump’s complaints of fentanyl being brought into the U.S. However, when asked if this was a negotiating tactic he said no and that it was an economic decision. Unfortunately, the UPenn Business alum is ignorant in the ways of economics as he continues to insist that tariffs will not be paid by Americans nor will it cause prices to increase. Both of those statements are categorically false and if this level of economic thought is how this new administration plans to make fiscal policy, we are in for a very turbulent few years.
Some of the immediate effects that Americans will experience as a result of these tariffs include:
- Higher Prices on Imported Goods – Many consumer goods, especially those sourced from China (like electronics, clothing, and household products), as well as raw materials and agricultural products from Canada and Mexico, will become more expensive as companies pass on the additional costs to consumers.
- Stock Market Volatility – Investors may react negatively to the tariffs, leading to increased volatility in financial markets. This could impact retirement accounts and investment portfolios. We saw a swift 300 point decline in the Dow Jones Industrial Average as soon as news broke of Trump instituting these tariffs.
- Supply Chain Disruptions – Businesses that rely on just-in-time supply chains may struggle to adjust, potentially leading to shortages or delayed shipments for certain goods.
- Retaliatory Tariffs – Canada, Mexico, and China could impose their own tariffs on U.S. goods, making American exports less competitive abroad and harming industries that rely on these markets. Canadian Prime Minister Justin Trudeau has already indicated that they are prepared to enact harsh retaliatory measures.
The last time that Trump imposed tariffs, the S&P 500 saw a significant drawdown of about $600 billion, as reported by The Economic Times.
Over the longer term, these tariffs will have much more dramatic impacts on our economy including:
- Increased Inflation – Over time, businesses will fully pass on higher costs to consumers, leading to rising prices on everything from groceries to cars. This could contribute to overall inflation in the economy. Just as we have gotten inflation under control, this shortsighted Trump tariff-tantrum could send inflation rates soaring again and force the Federal Reserve to raise rates, further hurting economic growth.
- Job Losses in Affected Industries – U.S. companies that depend on international trade (such as manufacturers and farmers) may suffer from reduced exports and higher costs, leading to job losses. These tariffs go completely against Trump’s own NAFTA 2.0 trade deal that he negotiated during his first term.
- Shift in Supply Chains – Companies may look for alternative suppliers, potentially moving manufacturing to other countries like Vietnam or India. However, this transition takes time and may not immediately offset price increases.
- Economic Slowdown – If tariffs remain in place for an extended period, they could weigh on overall economic growth by reducing consumer spending and business investment.
The bottom line is that in every scenario, tariffs will increase the prices paid by Americans for a wide assortment of goods. The Trump administration’s claim that prices won’t rise is ludicrous. Even if the long-term game plan by this administration is to force manufacturers to build all of their products in the U.S. in order to avoid tariffs, the resulting price of that good will ALWAYS be higher than if free trade were allowed to occur since the cost of labor and raw materials are substantially lower in the countries that we trade with.
