1Q 2025 Newsletter - Tariffs
Tariffs Are Here. Now What?
For many, the concept of tariffs may bring to mind a long-ago macro economics class on a bucolic college campus where we also studied inflation,unemployment, and the balance of payments. Those concepts may have seemed abstract at the dawn of our professional lives. However, they’ve now found their way to the forefront of our news feeds, and even our water cooler discussions.
Tariffs have left the realm of dusty economic textbooks – and not just for policy wonks and Wall Street analysts. They can have a real impact on our wallets—whether you’re at the grocery store, buying gas, or in the market for anew car.
According to the Ipsos Consumer Tracker, almost two of every three Americans believe that applying tariffs on imports will cause prices to rise, even if more than half (55%)can’t explain what tariffs are or how they work.
Put simply, tariffs tax imported goods. Leaders look to tariffs to control trade, protect domestic industries, and as leverage in negotiations with trading partners. While tariffs might appear to be a clever tactic to get other countries to pay more, they often result in higher costs for everyday consumers within our own borders.
How these rounds of new and potential tariffs will materialize remains to be seen.
Why Tariffs? The Trade War Card
During Donald Trump’s first term, his administration often looked to tariffs as leverage in trade negotiations. For an example, consider the role of tariffs in expediting and facilitating the United States-Mexico-Canada Agreement(USMCA), which replaced the Clinton-era North American Free Trade Agreement(NAFTA), and sought to drive companies to manufacture goods in the US rather than abroad.
Tariffs don’t exclusively bring positive economic results.
As talk heats up of new tariffs against American trade partners, the Tax Foundation, an international research think tank, published an analysis of the economic impact of Trump’s first-term tariffs. Research from the Tax Foundation found that the almost $80 billion of new tariffs from the first Trump administration and an additional $3.6 billion of Biden-era tariffs will decrease long-run GDP by 0.2% and cost the economy over 140,000 full-time equivalent jobs.
How Tariffs Can Ripple into Uncertainty and Inflation
Tariffs, at least in the short term, create uncertainty. Businesses can’t reliably predict what’s coming next and may balk at finalizing and committing to medium- and long-term plans. This uncertainty can cause pauses in investments, slowing job growth, and decreasing confidence in forward guidance on earnings.
Uncertainty from Corporate America can slow key economic indicators across the board, including stock market performance and hiring trends.
Tariffs also lead to inflationary pressures. When tariffs increase costs for manufacturers, those costs often get factored into the prices paid by consumers. The pandemic showed us how disruptions to supply chains can lead to price hikes in everyday items. Tariffs can lead to similar outcomes.
How Likely Is a Trade War?
President Trump quickly made good on his campaign promise to threaten, and implement, tariffs. However, even though some tariffs have already been applied and even more have been proposed and speculated upon, the likelihood of a full-on trade war remains unlikely.
It’s just not in the best interests of the US, Canada, or Mexico. Consider that a full-trade war could cause:
> Major economic distress for all three countries. GDP in the US, Canada, and Mexico would likely slow, and inflation could increase.
> Uncertainty regarding the future of the USMCA trade agreement. The Trump administration is looking to adjust trade terms,but a complete dismantling of the trade agreement from President Trump’s first term might be unpalatable for all three member countries.
> Political fallout. Experts have estimated that the per-household cost of a full-scale trade war could reach $1200 in the US, which, if realized, will prove politically unpopular among people in both political parties. With Republicans in control of Congress, they will likely face the brunt of the blame in future elections.
> Judicial challenges. Tariffs implemented without approval from Congress may face legal challenges that could slow or even block implementation.
> Federal Reserve Action. The Fed has slowed the cutting of interest rates we witnessed at the close of the Biden administration. Faced with new tariffs, they may seek to raise rates to combat inflationary pressures.