Donald Trump won’t take office for close to two months, but at many of the retailers you frequent it’s as if he’s already sitting at the Resolute desk.
Walmart, the nation’s largest retailer, is warning consumers to brace themselves. “We never want to raise prices,” Walmart Chief Financial Officer John David Rainey told CNBC recently. “Our model is everyday low prices. But there probably will be cases where prices will go up for consumers.”
That’s probably not what Americans who voted for Trump out of unhappiness with Biden-era inflation want to hear, so the president-elect’s continued emphasis on tariffs is puzzling on a political level. With inflation largely tamed in the past year, unemployment still low and growth remarkably strong, a lighter touch on economic policy seemingly would make more sense.
Alas, that is not the Trump way. On Monday he announced plans immediately upon taking office Jan. 20 to begin the process of imposing 25% tariffs on all goods imported from Canada and Mexico, as well as boosting existing tariffs on Chinese products by 10%.
Trump’s proclamations on his Truth Social network provoked alarm north and south of the border and served as a reality check to those Trump supporters who believe his protectionism talk is more bark than bite. Trump’s message to markets and corporate America alike was clear: I mean it about tariffs.
None of these developments should come as a surprise. Throughout his domination of America’s political scene since 2016, whether in or out of office, Trump has proved himself flexible on many policy matters. But the use of tariffs, both as a tool to apply diplomatic pressure on other countries and to raise revenues for the U.S. government, all along has been something in which Trump fervently believes.
The man even has waxed nostalgic for the presidency of William McKinley, a champion of tariffs in the late 19th century. The world has changed since then, to say the least; the economy is truly global now rather than regionally oriented. Hyper-aggressive trade postures have the potential to sow economic chaos around the world in ways unimaginable in McKinley’s day.
Trump’s economic saber-rattling against the Chinese also wasn’t a shock. But we can’t say the same of his targeting Canada and Mexico. After all, Trump in his first term negotiated and signed a major trade agreement with our two neighbors, which Congress affirmed on a bipartisan basis — a rarity in these hyperpartisan times. It’s fair to wonder with Monday’s announcement whether he’s readying to blow up that deal.
Trump justified the threatened tariffs on our North American friends by saying they weren’t doing enough to stem the flow of illegal immigrants and deadly drugs, particularly fentanyl, into the U.S. That implies he will relent if the two countries satisfy him they are making progress on his demands, a glimmer of hope for old-school Republicans who believe in free trade.
But just the stating of the threat brought shudders to large parts of corporate America. If Trump slaps the tariffs on Canada and Mexico, the U.S. auto sector will be affected since many major suppliers have sizable operations in Mexico. Canada accounts for more than half of U.S. oil imports, so drivers would likely see higher gas prices.
Those are just a few of the immediate effects the country would feel. Trade wars by their nature are unpredictable and trade partners don’t sit idly by when they’re attacked.
This page consistently has advocated against the use of tariffs in all but the most targeted ways. China, our foremost economic adversary, is in a different category than Mexico and Canada, and indeed the Biden administration has kept much of Trump’s past Chinese tariffs in place. China is suffering economically in part due to U.S. constraints on exports, which had driven Chinese success in the past.
Keeping the pressure on China is justifiable. Applying similar pressure to our friends is a different matter.
In the meantime, Trump’s threats are having what we expect will be a measurable effect on the U.S. economy once the fourth quarter of 2024 is in the books. Consumers are being encouraged to make big purchases like appliances or smartphone updates soon rather than wait for tariffs to make those pricey goods more expensive. If enough people take that advice, that could skew the economy in ways that could be negative next year, even if positive in the short term.
Likewise, producers have to consider their supply chains. Even if products are made in the U.S., often at least some of their components are manufactured abroad. So in this way tariffs can increase even the cost of goods “made in the U.S.A.” Those costs tend to get passed along to consumers.
Shippers and manufacturers say they expect many companies to “front-load” inventory shipments, buying more than they would otherwise and stockpiling components, to beat the anticipated Trump tariffs. That’s a rational response, but it’s also risky.
The costs to such an approach include securing enough storage space to stash the inventory as well as financing unanticipated purchase levels that cash flow might not support. If economic demand next year softens unexpectedly (say, due to tariff-induced inflation), that excess inventory could well become an albatross.
That’s not to say all these negative effects will come to pass. It is to say that the world is sufficiently unpredictable without them. Adding more chaos to the mix makes planning for the future inordinately difficult for job creators and consumers alike. And it’s posing a risk to an economy that’s doing quite nicely right now, thank you very much.
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