New York
CNN
—
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. And this strategy has the potential to upend the thing many voters care about the most: the economy and the cost of living.
But Trump’s tariffs pose a big risk: They could backfire, lifting already-high consumer prices at the grocery store, rocking the shaky stock market or killing jobs in a full-blown trade war.
“This may be the biggest own-goal yet,” Mary Lovely, senior fellow at the Peterson Institute for International Economics, told CNN in a phone interview. “This is a huge gamble. It’s a recipe for slowing down the economy and increasing inflation.”
The Wall Street Journal went a step further, publishing a scathing op-ed on Saturday titled: “The Dumbest Trade War in History.”
The op-ed argued that Trump’s justification for an “economic assault” on Canada and Mexico “makes no sense” and warned the strategy could end in disaster.
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.
Trump and his supporters often point out, correctly, that tariffs during his first term did not cause problematic inflation.
But those were different tariffs, applied in a very different world at a very different time.
Trump set in motion tariffs on $1.4 trillion of imported goods on Saturday. That’s more than triple the $380 billion worth of foreign goods that were hit with tariffs during Trump’ first term, according to estimates from the Tax Foundation.
During Trump’s first term, inflation wasn’t really a problem.
Today, life is so much more expensive, at the grocery store, at the car dealership and almost everywhere else. Consumers, investors and Federal Reserve officials are far more sensitive to even moderate price increases now.
The White House has argued Trump’s tariffs won’t spell trouble for the US economy, but some economists and trade experts are deeply concerned because these levies are aiming at America’s closest neighbors, Canada and Mexico.
During his first term, Trump threatened, but never pulled the trigger on, tariffs on Canada and Mexico. He was talked out of such moves by his advisers.
Hitting Canada and Mexico with blanket tariffs could cause supply chain chaos in the closely interconnected North American economy, leading to higher prices.
“To impose tariffs as high as 25% on our closest trading partners risks decimating the North American economic powerhouse—which the US relies on. Why would you want to burn your own house down?” said Christine McDaniel, a former trade official in President George W. Bush’s administration who is now a senior research fellow at George Mason University’s Mercatus Center.
That’s especially true in the auto industry, where parts often cross the border multiple time before a car arrives at the dealership. Wolfe Research has estimated the price of a typical car sold in the United States could increase by $3,000 due to tariffs.
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. That’s why the White House trimmed tariffs on Canadian energy to 10%, instead of the full 25%.
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.
Lovely said she is “very” confident the US tariffs will cause higher prices for consumers – especially at the grocery store and on building materials. She noted that shifts in the value of currencies could blunt some, but not all, of the price impact.
“It has to increase prices,” said Lovely. “There’s no way you can just levy this tax and then suddenly, poof, this burden disappears – even though that’s what he wants to convince us is true.”
Tariff-driven price hikes won’t happen immediately. Instead, they could play out in a drip-drip-drip fashion as the impact flows through complex supply chains.
“It’s not like everyone will mark up their shelves tomorrow, and then it’s done,” said Lovely. “You’ll see a slow pass-through to prices. One week it will be at the grocery store, another it will be at Home Depot.”
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.
“Steep tariff increases against US trading partners could create a stagflationary shock—a negative economic hit combined with an inflationary impulse—while also triggering financial market volatility,” Daco wrote in a report on Friday.
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.
The real key for Fed officials will be how tariffs alter consumer psychology, if at all.
“If tariffs drive inflation expectations higher, the Fed may feel pressured to keep rates restrictive for longer, tightening financial conditions and weighing on growth momentum,” Daco said in the new report.
Of course, 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.
“The administration is playing with fire,” said Joe Brusuelas, chief economist at RSM.