Economic Impact of Trump's Tariff Policy

President-elect Donald Trump threatened on Monday to impose a 25% tariff on imports from Mexico and Canada on his first day in office, Jan. 20, unless the two countries take stringent measures against drugs and cross-border immigration. Additionally, he announced plans for an “extra 10% tariff” on Chinese imports. During his campaign, Trump vowed to levy a 20% tariff on all U.S. imports and a 60% tariff on Chinese goods.

Key figures in the implementation of the tariff policy include Commerce Secretary Howard Lutnick and U.S. Trade Representative Jamieson Greer. Last week, Trump stated that Lutnick would “lead our tariff and trade agenda and be directly responsible for the operations of the U.S. Trade Representative’s office.” Trump this week appointed Jamieson Greer, a lawyer from Washington firm King & Spalding and a protégé of Robert Lighthizer, Trump’s first-term U.S. trade representative, as the new trade representative.

Furthermore, Treasury Secretary Scott Bessant will play a crucial role in shaping international economic policy, while National Economic Council Director Kevin Hassett will oversee economic policy coordination.

Trump believes tariffs can generate fiscal revenue for the U.S. and boost domestic manufacturing. Economists, however, worry that broad tariffs could raise the prices consumers and businesses pay for goods and services.

On Tuesday, Yale University's Budget Lab released data indicating that Trump’s tariff policy, along with retaliatory tariffs it might provoke, could lead to a 0.75 percentage point increase in U.S. consumer price inflation (CPI).

Goldman Sachs Chief Economist Jan Hatzius noted in a report that for every percentage point increase in effective tariff rates, the Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) index, would rise by 0.1%. Accordingly, if these tariff proposals are implemented, the core PCE inflation could increase by 0.9%.

Mexico is a key source of passenger car imports for the U.S., with a closely linked automotive industry. Many manufacturers have production bases in Mexico, exporting large volumes to the U.S. In 2023, passenger cars topped Mexico’s export list to the U.S.

Canada is a major exporter of energy, vehicles, and consumer goods to the U.S., and the largest external supplier of crude oil. A 25% tariff on all Canadian imports could pressure energy costs.

According to the USDA and U.S. Customs data, Mexico and Canada are the largest suppliers of U.S. agricultural products, with imports nearing $86 billion last year. About two-thirds of U.S. vegetable imports and half of its fruit and nut imports come from Mexico.

Last year, beer and tequila comprised nearly a quarter of Mexico’s agricultural exports to the U.S. Sam Kieffer, Vice President of Public Policy at the American Farm Bureau Federation, noted that tariffs could further increase the cost of Canadian fertilizer, which is already nearly 50% higher than in 2020.

It’s important to note that the timing and extent of Trump’s tariff policy remain uncertain. Some view the proposed tariffs as a negotiating tactic rather than a definitive policy, serving as leverage for other policy agendas. Subsequent phased increases might be more likely for China, while the threats against Mexico and Canada might not necessarily materialize, leaving room for negotiation.