[President Donald Trump is on the verge of hitting America’s three biggest trading partners with sweeping tariffs, a far more aggressive use of his favorite economic weapon than anything he did during his first term.
The looming import taxes on Mexico, Canada, and China will be a major test of Trump’s unorthodox use of tariffs, which he’s described as “the greatest thing ever invented.” It’s an enormous gamble, arguably a bigger one than any economic policy Trump enacted during his four-plus years in the White House.
Trump views tariffs as an almost magical negotiating tool, a powerful way to gain leverage over friends and allies. He has argued that tariffs are necessary to address major concerns, including the trade deficit, illegal immigration, and the flow of illicit drugs.
However, some economists and trade experts are deeply concerned because these levies are aiming at America’s closest neighbors, Canada and Mexico. Hitting Canada and Mexico with blanket tariffs could cause supply chain chaos in the closely interconnected North American economy, leading to higher prices.
The oil industry has pleaded with the White House to shield crude from the tariffs because Canada is the largest foreign source of oil. Analysts have warned that tariffs could increase gasoline prices in the Great Lakes, Midwest, and the Rockies.
Grocery store prices are a major pain point that weighed on voters this past election. But Mexico is America’s largest foreign source of fruit and vegetables, while Canada is No. 1 in grains, livestock/meats, and sugar/tropical products.
Economists are warning that the tariffs will cause higher prices for consumers, especially at the grocery store and on building materials. The problem is that higher input costs, along with retaliatory tariffs, could hurt spending by both businesses and consumers – and alarm investors and Fed officials.
Trump’s tariffs on Mexico, Canada, and China, along with those countries’ retaliatory tariffs, could wipe out 1.5 percentage points from US gross domestic product growth (GDP) in 2025 and another 2.1 percentage points in 2026, according to estimates by EY chief economist Gregory Daco.
A big wildcard is how the Fed will respond. Although Fed Chair Jerome Powell and his colleagues might be willing to overlook a one-time hit to prices, tariffs could force the US central bank to further delay interest rate cuts.
It’s still too early to say exactly how all of this will unfold. There are many variables, including how complex supply chains and consumers react. It’s entirely possible that a last-minute agreement is reached before the levies do real damage. Still, spiking tariffs by this much on this wide a range of goods is a risky strategy, one that not even Trump tried in his first term.
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