President Donald Trump’s plan to impose large tariffs on imports could raise inflation in the United States. A new study shows that if these tariffs are fully imposed, inflation could nearly double. This would add strain to the already struggling U.S. economy.
Gary Hufbauer, an economist at the Peterson Institute for International Economics, said that the impact would be a “serious shock.” He warned that tariffs could cause major inflation, increasing the cost of living for Americans.
This is a worst-case scenario. The actual impact could be less severe. The Trump administration has said that tariffs are also a tool for negotiation. The goal is to get other countries to lower their import fees on U.S. goods. Countries with the largest trade deficits with the U.S. would be targeted first.
Retailers and manufacturers in the U.S. might absorb some of the tariff costs, instead of passing them all to consumers. But even a partial increase in tariffs would likely raise prices. This would be worsened by tariffs already in place.
Capital Economics, an economic research group, has warned that these tariffs could play a large role in shaping the U.S. economy. They believe the tariffs will push inflation higher and affect trade balances.
What Are Reciprocal Tariffs?
Reciprocal tariffs are when one country imposes tariffs matching those of another country. This includes value-added taxes (VAT), which are like sales taxes but are usually higher than regular tariffs.
Trump has said that if another country charges a certain tariff, the U.S. will charge the same. This will create a change in how tariffs are handled. The U.S. does not have a VAT system, unlike other countries. This means VATs are a much higher burden on foreign goods in those countries.
The new tariffs will also target foreign government subsidies that hurt U.S. exports. However, it is not clear how these factors will affect specific tariff rates, according to Deutsche Bank economist Justin Weidner.
The White House has directed trade officials to study the effects of non-reciprocal trade policies on the U.S. They must report within six months with solutions and possible fiscal consequences.
The administration believes these tariffs will make global trade fairer. Trump says that other nations have long benefited from one-sided trade agreements with the U.S.
How Do Tariffs Impact Inflation?
Many countries impose higher tariffs on U.S. goods than the U.S. charges them. For example, the European Union charges a 10% tariff on imported cars, while the U.S. charges only 2.5% on cars from other countries. India charges a 100% tariff on American motorcycles, while the U.S. charges just 2.4% on motorcycles from India. Brazil charges an 18% tariff on U.S. ethanol, while the U.S. tariff on Brazilian ethanol is only 2.5%.
In 2023, the U.S. trade deficit was over $1 trillion. The 15 largest U.S. trading partners charge an average tariff of 6.7%, while the U.S. charges just 2.6%. When VATs are included, these costs can go as high as 29% in India, 28% in Brazil, 25% in the EU, 23% in Mexico, and 19% in Canada.
If Trump’s reciprocal tariffs are passed, the average U.S. import tariff could rise from under 3% to around 20%. This could raise inflation by 2 percentage points in a year. In December, inflation was at 2.6%. So, this increase would add more pressure on American families.
Deutsche Bank’s Weidner believes that U.S. companies will pass some of the tariff costs to consumers, while taking on the rest themselves. Even with this, inflation could still rise by about 1 percentage point, pushing annual inflation to 3.6%.
Challenges for Businesses and the Economy
Inflation has dropped since its peak in 2022, but prices are still high. The Federal Reserve has paused interest rate cuts because it worries that inflation might come back. If tariffs cause another spike in prices, the Fed might keep rates higher for longer.
Reciprocal tariffs will create new problems for U.S. businesses. Unlike other tariffs, which businesses can avoid by sourcing from other countries, widespread tariffs are harder to get around. “If the entire world faces these tariffs, it’s much harder to escape their effects,” Weidner said.
Determining the right tariff for thousands of products from nearly 200 countries would be a huge challenge. Hufbauer said the process would be very complex. A simpler method, he suggests, would be to base tariffs on the average foreign rate on U.S. goods. This would lower the total tariff burden, according to Goldman Sachs.
Trump has already imposed several tariffs, such as a 10% tax on China, 25% on steel and aluminum, and 25% on all imports from Canada and Mexico (though enforcement was delayed for negotiations).
These tariffs alone could increase inflation by more than 1 percentage point, according to Weidner. Adding reciprocal tariffs would likely make inflation worse.
While some economists think tariffs will cause a one-time increase in prices, others worry that inflation could continue. Businesses may raise wages and prices in response to higher costs, which could keep inflation high. Some experts believe economic growth will not slow too much. They think Trump’s tax cuts might balance out the negative effects of rising tariffs.
The potential impact of Trump’s proposed tariffs is large. While the administration believes they will create a fairer trade system, many economists warn that these measures could lead to higher inflation. American consumers could see price increases, and businesses will face new challenges. Only time will tell if these tariffs will achieve their goals or make the economy more difficult to navigate.
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