The macroeconomics of new tariffs
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Trucks queue at the U.S.-Mexico border. Photo: Guillermo Arias/AFP via Getty Images
Big-time tariffs are now in place on America's three largest trading partners. It should be enough to meaningfully move the dial on U.S. economic growth and inflation.
The big picture: President Trump implemented 25% tariffs on imports from Canada and Mexico (10% on Canadian energy) and a cumulative 20% on Chinese imports, after postponing the North American levies a month ago.
- If the new trade regime is sustained, that will likely mean somewhat higher inflation and lower growth over the coming years, according to economists' projections.
- Notably, Trump has threatened additional import taxes on other trading partners but not offered any clear off-ramps or process by which importers can gain exclusions from the tariffs. It raises the risk of a one-way ratchet toward higher trade barriers.
By the numbers: After accounting for how other countries, businesses and consumers will likely react to the tariffs, the Yale Budget Lab estimates that GDP growth is on track to be 0.6 percentage point lower this year than it would have been without the trade war.
- The tariffs will raise this year's inflation by 1% to 1.2%, depending on the extent of retaliation from trading partners, costing the typical household $1,600 to $2,000.
- Yet that's before accounting for the ways consumers would substitute cheaper goods for those hit hard by tariffs. After those effects, the estimated inflation hit is 0.7% to 0.9%, or $1,100 to $1,400.
- If kept in place, the tariffs would raise $1.4 trillion to $1.5 trillion in federal revenue over the next decade, per the Yale group's modeling.
The bottom line: The U.S. economy is big and resilient, and it takes a lot to shake it. But this round of tariffs is big enough that, if sustained, people are likely to feel the impact.
Go deeper: Tariffs will likely cause price hikes on these goods.
