Trump Tariffs 2.0

Here we go again. Effective Tuesday February 4th, the Trump Administration will slap a new round of 25 percent tariffs on Mexico and Canada, a 10 percent tariff on energy products from Canada, and an additional 10 percent tariff on goods from China. In response, Canada has already announced 25 per cent tariffs on more than $100 billion worth of goods, including US alcohol, clothing, household appliances and lumber. Mexico and China are preparing to retaliate with their own set of tariffs on U.S. goods, escalating the situation.

As details develop, pour some tequila and grab your last bit of guacamole, it’s time for a tariff Q&A:

What Is a tariff? A tax or duty imposed on a particular class of imports or exports.

Who Pays for a tariff? The company that imports the good is on the hook for the extra charge (importantly, the exporting country does not pay for the tariff.) The importer may choose to absorb the extra cost, reducing its profit, or pass it along to consumers.

How Can Tariffs Push Up Inflation? If importers pass along the cost of tariffs to their customers, then prices could rise for those goods. The scale and scope of this round of tariffs could push the inflation rate above 3 percent, though most agree that we are not likely to see anywhere near the 9.1 percent inflation rate recorded in mid-2022.

Is There Anything Positive About Tariffs? Tariffs can be used as a bargaining chip in international negotiations; as a means to beef up tax revenue; and as a way to shield domestic producers from foreign competition.

How Can Tariffs Impact the Economy? In addition to higher inflation, tariffs might cause importers to lay off some of their workers and could lead to a slowdown in economic growth.

How Do Tariffs Impact the Federal Reserve? At last week’s policy meeting, the Federal Reserve took no action, leaving the fed funds rate at 4.25-4.50 percent. In its accompanying statement, officials described the economy as expanding “at solid pace”, a point underscored by the first estimate of fourth quarter Gross Domestic Product, which showed the economy expanding at an annualized pace of 2.3 percent for the final three months of the year. For all of 2024, the economy grew by 2.5 percent. However, with inflation running at 2.8 percent, which is still above the Fed’s desired 2 percent target, the Fed believes that it can afford to be patient. Given the looming impact of tariffs, the Fed might remain on the sidelines until there is more clarity on the economy.

SELECTED TRADE STATS:

• With the new actions, the effective tariff rate on all U.S. imports is up to around 10%, for the first time in more than 75 years, according to Capital Economics.
• The U.S. is the largest goods importer in the world, according to government data, Mexico, China and Canada represent imports of more than $1.3T (as of 2023) or 43 percent of the $3.1T of goods that the U.S. imports overall.
• Crude oil is the No. 1 product the U.S. imports from Canada, accounting for 60% of U.S. oil imports. Midwestern states, who rely more on Canadian energy products, could be harder hit when it comes to gas prices.
• Mexico and Canada are the U.S.’ top trading partners for vehicles and car parts, accounting for nearly half of motor vehicle imports in 2023. Producing a car often means crossing borders multiple times, each time which will now trigger a tariff.