Trump’s New Tariffs Risk Inflation and Global Economic Instability

Inauguration Of Donald Trump As 47th President Of The United States

PALM BEACH, Fla. — President Donald Trump’s planned imposition of new trade penalties on Canada, Mexico, and China represents a significant early challenge to America’s three largest trading partners, risking increased inflation and potential global economic disruption.

Trump views the 25% tariffs on the two North American allies and the 10% tax on imports from China as a means for the United States to leverage its economic power to influence global affairs.

“You see the power of the tariff,” Trump told reporters Friday. “Nobody can compete with us because we have by far the biggest piggy bank.”

The president is making a considerable political gamble, assuming his actions won’t worsen inflation, trigger financial instability, or lead to voter backlash. Last year’s AP VoteCast election survey revealed a divided public opinion on tariffs.

These tariffs may be temporary if Canada and Mexico successfully negotiate with Trump to strengthen their approach to illegal immigration and fentanyl smuggling. Trump’s actions against China, also related to fentanyl, build upon existing import taxes.

Trump is fulfilling 2024 campaign promises central to his economic and national security platform, despite previous downplaying of higher import taxes by his allies as mere negotiation tactics.

Further import taxes are anticipated, indicating tariffs will remain a key element of his second term. On Friday, he mentioned potential targets including imported computer chips, steel, oil, natural gas, copper, pharmaceutical drugs, and imports from the European Union— potentially positioning the U.S. against much of the global economy.

Trump’s announcement prompted a swift negative reaction in financial markets, with the S&P 500 stock index falling.

The impact of the tariffs on business investments spurred by Trump’s corporate tax cuts and deregulation plans remains unclear. Tariffs generally raise prices for consumers and businesses by increasing the cost of imported goods.

Many voters supported Trump in November, believing he could better manage inflation that rose under President Joe Biden. However, inflation expectations are rising in the University of Michigan’s consumer sentiment index, with respondents anticipating a 3.3% increase— exceeding December’s 2.9% annual inflation rate.

Trump advocates for increased government revenue from tariffs, reminiscent of the pre-1913 income tax era. He claims, contrary to economic evidence, that the U.S. enjoyed its greatest prosperity in the 1890s under President William McKinley.

“We were the richest country in the world,” Trump said Friday. “We were a tariff country.”

Trump, aiming to reshape America using McKinley’s model, is conducting a real-time test of the economists’ warnings about tariffs causing higher prices. While his first term tariffs did not significantly increase overall inflation, his current, far larger-scale approach could elevate prices if sustained.

Trump has affectionately referred to McKinley, president in 1896 and 1900, as the “tariff sheriff.”

Brad Setser, a senior fellow at the Council on Foreign Relations, noted on X that these tariffs, “if sustained, would be a massive shock — a much bigger move in one weekend than all the trade action that Trump took in his first term.”

Setser highlighted that tariffs on China, without exemptions, could increase iPhone prices, testing corporate America’s influence on Trump. Apple CEO Tim Cook attended Trump’s inauguration last month.

Recent research by a team of economists on Trump’s tariff options suggests the penalties would hinder growth in Canada, Mexico, China, and the U.S. However, Cornell University economist Wending Zhang, involved in the research, noted that Canada and Mexico would be disproportionately affected due to their reliance on the U.S. market.

Canadian Prime Minister Justin Trudeau warned Canadians of potential hardship, indicating Ottawa’s readiness for retaliatory tariffs if necessary, and characterizing the U.S. penalties as self-defeating.

Trudeau stated that Canada is addressing Trump’s border security concerns through a CDN$1.3 billion (US$90 million) border plan involving helicopters, canine units, and imaging technology.

Mexican President Claudia Sheinbaum emphasized Mexico’s efforts to reduce illegal border crossings and fentanyl trafficking. While highlighting ongoing dialogue since Trump’s November announcement, she confirmed Mexico’s preparedness for a response.

Mexico has a “Plan A, Plan B, Plan C for what the United States government decides,” she said.

Trump still needs congressional approval for a budget, tax cuts, and increased government borrowing authority. The outcome of his tariff plans could strengthen or weaken his position.

Democrats are proposing legislation to restrict the president’s ability to impose tariffs without congressional approval. However, this is unlikely to succeed in the Republican-controlled House and Senate.

“If this weekend’s tariffs go into effect, they’ll do catastrophic damage to our relationships with our allies and raise costs for working families by hundreds of dollars a year,” said Sen. Chris Coons, D-Del. “Congress needs to stop this from happening again.”