The tariffs that President Donald Trump said he’ll impose Saturday on imports from Canada, Mexico and China would reignite inflation and deal a significant blow to an economy that has been chugging along, economists said.
The Federal Reserve’s preferred annual inflation measure, which was at 2.8% in December, would rise to 3% by the end of the year, estimates Ryan Sweet, chief U.S. economist for Oxford Economics. Sweet had expected the reading to fall to 2.2%, close to the Fed’s 2% goal, without the import duties.
That gauge of core inflation, which excludes food and energy items and reflects more sustainable trends, has tumbled from a high of 5.6% in early 2022 that was spurred by pandemic-related supply chain troubles and a burst of consumer demand.
Some economists have forecast a bigger impact of the tariffs on inflation. Deutsche Bank has projected a more than percentage point rise.
What are tariffs in simple terms?
Tariffs, which are taxes on foreign goods shipments to the U.S., are paid by domestic manufacturers or retailers and typically passed along to consumers. But because they’ll reduce imports, they likely would strengthen the dollar, making foreign goods less expensive for consumers and partly offsetting the direct effects of the levies, Sweet said.
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Companies also could partly absorb the cost of the tariffs in their profits, mitigating the consumer impact.
Those measures would lessen “some but not all of the impact of the tariffs,” Sweet said. The duties still “will put upward pressure on inflation.”
How do tariffs affect the economy?
The tariffs, meanwhile, also would lower economic growth by a hefty 1.2 percentage points this year, from 2.6% to 1.4%, Sweet estimated. The higher costs would force consumers to reduce their overall spending. And likely retaliatory tariffs from the countries affected would dampen U.S. exports, hobbling American manufacturers.
Canadian Prime Minister Justin Trudeau said Friday his country would forcefully and immediately respond.
“It’s not what we want, but if he moves forward, we will also act,” he said in televised remarks.
That would amount to a substantial drop in economic growth from 2.8% in 2024, a performance the Commerce Department announced this week. Yet even before they took effect, the tariffs likely effected consumer spending in the fourth quarter by prompting Americans to buy furniture, appliance and other goods before the levies go into effect, boosting consumption late last year, Sweet said.
Weaker growth also would be mean a softer labor market. The unemployment rate would average 4.5% this year, 0.3 percentage points higher than without the tariffs, Sweet said.
Deutsche Bank has forecast a smaller hit to growth of three-tenths of a percentage point.
The overall impact of the fees could be eased by exemptions. Trump on Friday said the tariff on Canadian oil imports likely would be set at 10% rather than 25%. And Sweet raised the possibility of exemptions on lumber from Canada, agricultural imports from Mexico and auto-related goods from both countries.
What does the US import from Canada and Mexico
The effects of the duties on the U.S. economy and inflation are significant because Canada, Mexico and China are the largest U.S. trading partners. Last year, the U.S. imported $480 billion goods from Mexico, including vehicles, electrical equipment, furniture, plastics and metal, according to Trading Economics.
And the $429 billion dollars the country imported from Canada included vehicles, oil, machinery, wood, metal and pharmaceutical products, Trading Economics figures show.
Tariffs would especially hamper the auto industry, which imports raw materials from Mexico to make parts that are then shipped back to that country for vehicle assembly, Gary Hufbauer, senior fellow at the Peterson Institute for International Economics previously told USA TODAY.
Contributing: Joey Garrison, USA TODAY; Reuters
