My Expectations for the Economic Effects of Tariffs

By Dominic Pino

Monday, March 03, 2025

 

If Trump is actually going to do unilateral tariffs on Mexico and Canada tomorrow — remember, he said once before that there was nothing they could do to avoid them and then changed his mind, and the whole thing is legally questionable and could be stopped by the courts — here’s what I expect the economic effects to be:

 

·         Negligible effect on the inflation rate, as measured by the CPI index or the PCE index. If inflation doesn’t budge, expect a bunch of Trump boosters to try to say they told you so, when in reality, we wouldn’t expect tariffs to have much of an effect on the economy-wide inflation rate. Tariffs make imports more expensive, which will result in less spending elsewhere in the economy. Tariffs do not increase the money supply, so we wouldn’t expect them to have a big impact on inflation.

 

·         Higher prices for the goods to which the tariffs apply. Foreign businesses will mostly not compensate for the tax increase by lowering prices, as the Trump administration claims they will. The tax will be passed on to American consumers and businesses, as it was during Trump’s first term. Because Canada and Mexico are among the top buyers of U.S. petroleum products and sellers of U.S. crude oil imports, expect energy markets to be thrown into a tizzy if energy products are not excluded.

 

·         Negative effect on GDP growth. Expect the first-quarter GDP numbers, which the Bureau of Economic Analysis will release on April 30, to underperform. The tariffs have already imposed costs on the economy before taking effect. If they take effect, they will harm productive industries by raising their input costs. The steel and aluminum tariffs, which are a separate measure, are a textbook growth-harming policy because they apply to products used to make other stuff, creating a ripple effect of cost increases.

 

·         Negative effect on jobs numbers. This effect will probably be mild but will nonetheless be detectable. Labor is one input to production. By raising the prices of other inputs (steel, aluminum, oil, copper, etc.), the tariffs, if enacted, will leave less money available to pay workers. Businesses will probably cancel shifts, eliminate open job postings, cut bonuses, and lay off some workers.

 

·         Continued stock market underperformance. Trump likes to say he’s great for the stock market. The stock market does not agree, and tariffs are a big part of the reason why. If you had invested $1,000 in the following major stock market indices on November 6, the day after the presidential election, here’s approximately what your investment would be worth at market close today:

 

o    FTSE 100 (U.K.): $1,085

o    CAC 40 (France): $1,114

o    FTSE MIB (Italy): $1,151

o    IBEX 35 (Spain): $1,183

o    DAX (Germany): $1,216

o    DJIA (U.S.): $990

o    S&P 500 (U.S.): $990