Former President Donald Trump’s proposal to impose reciprocal tariffs on foreign imports could significantly drive up inflation in the U.S. A new study suggests that fully implementing these tariffs might nearly double the current inflation rate, adding pressure to the already rising consumer prices.
Gary Hufbauer, an economist at the Peterson Institute for International Economics, explained the potential impact of the tariffs. “It would be a real shock,” he said. “Quite a bit of inflation.” His comments reflect the concern that the wide-reaching tariffs could disrupt the economy in significant ways.
The White House, however, has tried to downplay the worst-case scenario. Trump’s team has emphasized that the tariffs would act partly as a bargaining tool. The goal is to encourage other countries to lower their trade barriers against U.S. goods. A White House official also mentioned that countries with the largest trade deficits with the U.S. would be targeted first.
How These Tariffs Could Impact Prices
Economists believe that American retailers and manufacturers might absorb some of the tariff costs, meaning consumers might not see the full impact. However, the broad nature of the tariffs—designed to match foreign taxes, subsidies, and trade barriers—could still lead to noticeable price increases. When combined with existing trade restrictions, these new tariffs might push inflation even higher.
A recent note from Capital Economics warned that reciprocal tariffs could have a substantial effect on the economy. The note, titled “U.S. Reciprocal Tariffs Will Be a Big Deal,” highlighted the significant risks these tariffs pose.
What Are Reciprocal Tariffs?
Under Trump’s plan, the U.S. would impose import duties that mirror the tariffs and value-added taxes (VAT) other countries apply to American exports. This approach is particularly concerning because VATs can be much higher than standard tariffs.
“Whatever another country charges, we’re charging them,” Trump explained in a news conference.
Typically, VATs are applied to both domestic and foreign goods. In contrast, the U.S. does not have a national VAT but instead relies on state-level sales taxes, which don’t apply to imports. If the U.S. were to include VATs in its tariffs, it would be a significant shift in trade policy. Analysts from Capital Economics and Goldman Sachs have noted that this could complicate the situation further.
The reciprocal tariffs would also aim to counteract foreign government subsidies, regulatory barriers, and other restrictions that limit U.S. exports. However, the specifics of how these factors would translate into U.S. tariffs remain unclear. Deutsche Bank economist Justin Weidner noted that the details are still uncertain, making it difficult to predict the exact impact on U.S. consumers.
Trump’s memo has directed U.S. trade officials to assess the damage caused by non-reciprocal trade arrangements. The report must be completed within six months, detailing potential solutions and the fiscal impact of these changes.
Global Trade Disparities and Their Impact
Several of the U.S.’s largest trading partners impose higher tariffs on American goods than the U.S. charges on their imports. For example, the European Union places a 10% tariff on imported cars, while the U.S. applies only a 2.5% tariff on cars from the EU. India imposes a 100% tariff on American motorcycles, compared to the U.S.’s 2.4% on motorcycles from India. Brazil charges an 18% tariff on U.S. ethanol imports, while the U.S. applies just a 2.5% tariff on Brazilian ethanol.
According to the White House, the U.S. goods trade deficit surpassed $1 trillion last year. Paul Ashworth, Chief North American Economist at Capital Economics, estimates that the 15 largest U.S. trading partners impose an average trade-weighted tariff of 6.7%, while the U.S. charges only 2.6% on average. If VATs are included, tariffs on U.S. imports could rise to 29% for goods from India, 28% for Brazil, 25% for the EU, 23% for Mexico, and 19% for Canada.
The Potential Inflation Impact
Ashworth predicted that the average tariff on U.S. imports could jump from less than 3% to around 20%. This increase would likely push inflation up by two percentage points, which would be a significant change. In December, the U.S. inflation rate stood at 2.6%, according to the Federal Reserve’s preferred measure.
Weidner from Deutsche Bank also warned that U.S. businesses would likely pass on half of the tariff costs to consumers. This would increase annual inflation by about 1%, pushing it to 3.6%.
Inflation has already eased from its peak of 7.2% in mid-2022, as pandemic-related supply chain disruptions and consumer demand spikes subsided. However, it remains elevated, which has led the Federal Reserve to halt planned interest rate cuts. If tariff-driven inflation continues to rise, the Fed may be forced to maintain higher interest rates for longer than anticipated.
A Broader Impact on U.S. Trade
The unique challenge of reciprocal tariffs is that they would affect nearly all of the U.S.’s trading partners. If tariffs are applied universally, businesses won’t be able to avoid them by shifting imports from one country to another. As Weidner from Deutsche Bank pointed out, “If it’s the entire world facing high tariffs, avoiding them becomes much harder.”
The complexity of calculating precise tariffs for thousands of products from nearly 200 countries is another challenge. Hufbauer suggested a simpler approach that could reduce the burden—basing tariffs on the average rate that each country applies to U.S. goods. Goldman Sachs has noted that this approach could lower the proposed tariff rates.
If implemented, Trump’s proposed reciprocal tariffs could further complicate the U.S. trade landscape. This proposal would add to the series of import duties the former president imposed during his time in office, including tariffs on China, steel, and aluminum. These measures alone could increase inflation by over one percentage point, according to Weidner.
While tariffs typically cause a one-time price increase, their long-term effects could be lasting. Higher prices could lead to higher inflation expectations, which might lead to wage demands and further price hikes. However, some economists, like Ashworth, argue that U.S. economic growth would likely remain stable, as Trump’s tax cuts could offset some of the negative impacts of the tariffs.
For more information on the potential impact of tariffs and other economic news, visit Wealth Magazine.