President-elect Donald Trump has announced plans to implement significant changes through executive orders on his first day in office, focusing on tariffs, border security, and immigration. Trump plans to impose a 25% tariff on all products coming into the United States from Mexico and Canada. These tariffs are intended to remain in effect until these countries address the issues of drugs, particularly fentanyl, and illegal immigration into the U.S. An additional 10% tariff is proposed for Chinese goods, on top of any existing tariffs.
Though tariff policy is directly tied to efforts to boost domestic manufacturing, curb illegal immigration and drug trafficking it has the potential to create inflation for American consumers,
Trump has stated these measures will continue until there is a significant reduction or cessation of these issues. The proposed tariffs are seen as both a punitive measure and a negotiation tactic to push for stronger border security measures from Mexico and Canada.
On January 20, 2025, Trump’s first day in office, he intends to sign executive orders to enact these tariffs. These plans are part of a broader “America First” policy, echoing Trump’s campaign promises to use tariffs to protect American industries and jobs, although economists have warned that such measures could lead to higher prices for U.S. consumers and potentially disrupt trade relationships with key partners. The announcement of these tariffs has already caused fluctuations in currency values, with the dollar strengthening against the Canadian dollar and Mexican peso. There is also concern about potential inflation and higher costs for American consumers on imported goods and potential Regulatory concern that these tariffs could violate existing trade agreements like the USMCA (U.S.-Mexico-Canada Agreement) and could provoke retaliatory measures from affected countries.
These actions are reflective of Trump’s approach to using executive powers to push through policy changes without needing Congressional approval, a strategy he employed during his first term.
The imposition of tariffs by the United States on goods from the European Union (EU) can indeed impact the relationship between these two major trading partners. Tariffs act as a tax on imports, making EU goods more expensive in the U.S. market. This could reduce EU exports to the U.S., impacting industries like automotive, machinery, and pharmaceuticals, where the EU has significant trade interests. The U.S. is the EU’s one of the largest trading partner, so any tariff would directly influence economic activities on both sides of the Atlantic. The EU has historically responded to U.S. tariffs with counter-tariffs. Such actions could escalate into a broader trade war, damaging economic ties and growth prospects. Higher tariffs might lead to increased prices for consumers in both regions due to the cost of goods, potentially sparking inflation concerns, particularly in the U.S. where EU imports play a significant role in various sectors.
The EU-U.S. relationship, rooted in shared history, values, and NATO, could be strained by protectionist trade policies. Tariffs under Trump have been perceived by some in Europe as undermining the traditional transatlantic alliance, potentially affecting cooperation on other fronts like security and environmental policy. Tariffs could be used as leverage in negotiations, pushing the EU towards concessions in other areas of policy or trade. However, this approach can also lead to a breakdown in trust, making collaborative efforts on global issues more challenging. Opinion in Europe might shift further against U.S. policies, influencing public support for U.S.-EU partnerships. Politicians might capitalize on this sentiment, leading to a more protectionist stance in Europe as well.
The Organisation for Economic Co-operation and Development (OECD) has expressed concerns that rising trade tensions could pose a risk to global trade growth. According to the OECD, the current cycle of trade disputes is not only affecting manufacturing sectors by disrupting global value chains but also generating significant uncertainty that impacts investment decisions. This uncertainty can lead to reduced business confidence, which in turn can hamper trade growth. The OECD warns that further moves toward protectionism might disrupt supply chains, raise consumer prices, and negatively impact economic growth. This is because tariffs or other trade barriers can increase the cost of goods, which businesses might pass on to consumers. The organization points out that geopolitical tensions, including conflicts and the possibility of new or escalated disputes, could further complicate trade relationships. For instance, an intensification of conflicts in regions like the Middle East could disrupt energy markets and trade routes, adding to the economic challenges. To mitigate these risks, the OECD suggests that policy action should focus on reducing inflation durably, addressing fiscal pressures, and tackling labor shortages to help alleviate structural impediments to higher trend growth. They advocate for a careful calibration of monetary policy and fiscal strategies to maintain economic stability while fostering trade.
Trump’s proposed tax cuts, regulatory rollbacks, and other economic policies could potentially counteract some inflationary pressures by boosting economic growth or increasing supply, though this depends on how these policies are implemented and their overall economic impact. Businesses, especially those importing goods from countries like China, Mexico, or Canada, might pass these additional costs onto consumers, leading to higher prices for a wide range of products. Tariffs could disrupt established supply chains, potentially leading to shortages or increased costs for domestically produced alternatives, which in turn can drive up prices. This could affect industries like automotive, where parts are sourced from multiple countries, suggesting a potentially significant impact on consumer goods prices.
while Trump’s tariff policy could lead to higher consumer prices, suggesting a form of inflation, the extent to which this results in sustained inflation depends on numerous factors including the duration of the tariffs, the response of foreign markets, and compensatory actions taken by the U.S. government. The immediate effect might be a noticeable increase in prices, but whether this translates into long-term inflationary pressure is less clear and would require monitoring of economic indicators post-implementation.
Galactik Views