The World Economy Awaits Trump's First Round of Tariffs

New York Times

31-01-2025

President Trump's threats to enact stiff tariffs on Canada, Mexico and China on Saturday have left the world trading system on edge as international policymakers and markets wait to see whether Mr. Trump will follow through on actions that could set off a destabilizing global trade war.
Mr. Trump has promised tariffs of 25 percent on Canada and Mexico and 10 percent on China, punishments he says are necessary to halt the flow of migrants and drugs, particularly fentanyl, into the United States.
It remains to be seen whether Mr. Trump will follow through with that threat and, if he does, what imports would be subject to his levies.
Mr. Trump's advisers have been weighing different scenarios, like tariffs that would apply to specific sectors, such as steel and aluminum, or levies that would be announced but not go into effect for several months, according to people familiar with the planning.
But it is not clear what the president has decided. Canadian and Mexican officials have been scrambling to persuade Mr. Trump to hold off on the tariffs, engaging in last minute talks with Secretary of State Marco Rubio and trying to show the efforts they are making to police the border. Auto and energy companies are pushing the White House and the administration hard not to apply tariffs, one of the people said.
President Claudia Sheinbaum of Mexico told reporters on Friday that the Mexican government had been working for months on a plan to react to possible tariffs. 'We are prepared for any scenario,' she said, adding that Mexico is 'doing everything in our power' to prevent tariffs. 'What do we want? That dialogue with respect prevail.'
Speaking from the Oval Office on Thursday, Mr. Trump suggested he was ready to cut off imports from Canada and Mexico, two of America's largest trading partners and closest allies.
'We'll be announcing the tariffs on Canada and Mexico for a number of reasons,' he said. 'I'll be putting the tariff of 25 percent on Canada, and separately, 25 percent on Mexico, and we'll really have to do that.'
'We don't need what they have,' Mr. Trump said, referring to Canada and Mexico. The three countries have been governed by a trade agreement for more than 30 years, and many industries, from automobiles and apparel to agriculture, have grown highly integrated across North America.
He added that tariff rates could increase over time and suggested that the tariffs might not apply to oil imports, a decision that could avoid a spike in gas prices.
While the United States is the world's largest oil producer, refineries need to mix the lighter crude produced in domestic fields with heavier oil from places like Canada to make fuels like gasoline and diesel. Roughly 60 percent of the oil that the United States imports come from Canada, and about 7 percent comes from Mexico.
According to Tom Kloza, the global head of energy analysis at Oil Price Information Service, if fuel producers respond to the tariffs by cutting production, gasoline prices in the Midwest could climb 15 to 20 cents a gallon, with more muted effects in other parts of the country.
Mr. Trump's desire to hit allies and competitors alike with tariffs over issues that have nothing to do with trade demonstrates the president's willingness to use a powerful economic tool to fulfill his broader domestic policy agenda.
The prospect of new tariffs has created considerable uncertainty about how those levies might affect America's economic outlook and certain industries. Lobbying groups representing sectors such as retail and agriculture, which would be exposed to U.S. tariffs, said this week that they were in the dark and concerned about how Mr. Trump might proceed.
In a note on Friday, economists at Goldman Sachs said that Mr. Trump's comments on Thursday raised the odds that the president would hit Canada and Mexico as soon as Saturday, but that they expected tariffs to be phased in over time.
'We still do not see a sustained 25 percent tariff on both countries as the base case,' the wrote. 'Instead, we think it is more likely that Trump will announce a tariff with delayed implementation, targeted at certain imports, starting at a lower rate that rises over time, or some combination of these.'
That said, Goldman's economists said that if Mr. Trump did proceed with across-the-board tariffs, it would both raise prices in the United States and slow economic growth.
The potential economic implications from tariffs are also complicating matters for the Federal Reserve, which is still trying to wrestle inflation down to its 2 percent target. The Fed this week held interest rates steady, after a series of cuts, amid persistent inflation and questions about how the tariffs would play out.
The economic fallout would depend on how they were structured, but the ripple effects could be broad.
According to economists at S&P Global, the auto and electric equipment sectors in Mexico would be most exposed to disruption if tariffs were enacted, as would mineral processing in Canada. In the United States, the largest risks would be to the farming, fishing, metals and auto sectors.
On balance, most economists expect fresh trade barriers to raise prices for U.S. businesses and households, which could lead to a temporary burst of higher inflation. Whether that escalates into a more pernicious problem will depend on whether Americans' expectations about future inflation start to shift higher in a meaningful way.
Over time, economists also worry about the effects on growth, warning that trade tensions are likely to lead to less investment, more subdued business activity and slower growth.
Ernie Tedeschi, the director of economics at the Yale Budget Lab, estimates that a 25 percent tariff on all Canadian and Mexican imported goods — paired with a 10 percent tariff on all Chinese imports — would lead to a permanent 0.8 percent bump in the price level, as measured by the Personal Consumption Expenditures price index. That translates to roughly $1,300 for households on average. Those estimates assume that the targeted countries enact retaliatory measures and that the Federal Reserve does not take action by adjusting interest rates.
Mr. Tedeschi expects this to eventually shave 0.2 percent off gross domestic product once inflation is taken into account.
Mr. Trump's top economic advisers have refuted the idea that the tariffs would fuel inflation.
At his confirmation hearing this month, Treasury Secretary Scott Bessent dismissed concerns from Democrats about Mr. Trump's trade policy, suggesting that exporters from countries such as China would lower their prices in the face of higher U.S. tariffs. Mr. Bessent said last year that it would be prudent if any tariffs were phased in so that any associated 'price adjustment' could be absorbed gradually by the economy.
Mr. Trump's pick to be commerce secretary, Howard Lutnick, also embraced tariffs at his confirmation hearing and pushed back against the notion that they would fuel inflation. He suggested that Canada and Mexico might be able to avoid the tariffs that Mr. Trump was dangling if they closed their borders to fentanyl.
Mr. Lutnick indicated that he believed 'across the board' tariffs on countries would be most effective, arguing that China should face the highest rates and that Europe, Japan and South Korea were also treating American industries unfairly.
'We need that disrespect to end, and I think tariffs are a way to create reciprocity, to be treated fairly, to be treated appropriately,' Mr. Lutnick said.