Money Wealth Inflation could be increased by Trump's tariffs

New trade penalties against Canada, Mexico and China that President Donald Trump plans to impose Saturday represent an aggressive early move against America’s three largest trading partners, but at the risk of higher inflation and possible disruptions to the global economy.

In Trump’s view, the 25 per cent tariffs against the two North American allies and a 10 per cent tax on imports from Washington’s chief economic rival are a way for the United States to throw around its financial heft to reshape the world.

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 Republican president is making a major political bet that his actions will not worsen inflation, cause financial aftershocks that could destabilise the worldwide economy or provoke a voter backlash. AP VoteCast, an extensive survey of the electorate in last year’s election, found that the US was split on support for tariffs.

It is possible that the tariffs could be short-lived if Canada and Mexico can reach a deal with Trump to more aggressively address illegal immigration and fentanyl smuggling. Trump’s move against China is also tied to fentanyl and comes on top of existing import taxes.

Trump is honouring promises he made in the 2024 White House campaign that are at the core of his economic and national security philosophy, though Trump allies had played down the threat of higher import taxes as mere negotiating tactics.

The president is preparing more import taxes in a sign that tariffs will be an ongoing part of his second term. On Friday, he mentioned imported computer chips, steel, oil and natural gas, as well as against copper, pharmaceutical drugs and imports from the European Union moves that could essentially pit the US against much of the global economy.

Trump’s intentions drew a swift response from financial markets, with the S&P 500 stock index slumping after his announcement Friday.

It is unclear how the tariffs could affect the business investments that Trump said would happen because of his plans to cut corporate tax rates and remove regulations. Tariffs tend to raise prices for consumers and businesses by making it more expensive to bring in foreign goods.

Many voters turned to Trump in the November election on the belief that he could better handle the inflation that spiked under Democratic President Joe Biden.

But inflation expectations are creeping upward in the University of Michigan’s index of consumer sentiment as respondents expect prices to rise by 3.3 per cent. That would be higher than the actual 2.9 per cent annual inflation rate in December’s consumer price index.

Trump has said that the government should raise more of its revenues from tariffs, as it did before the income tax became part of the Constitution in 1913. He claims, despite economic evidence to the contrary, that the US was at its wealthiest in the 1890s under President William McKinley.

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

Trump, who has aspired to remake America by using McKinley’s model, is conducting a real-time experiment that the economists who warn tariffs lead to higher prices are wrong.

While the tariffs in his first term did not meaningfully increase overall inflation, he is now looking at tariffs on a much grander scale that could push up prices if they’re enduring policies.

Trump has fondly called McKinley, an Ohioan elected president in 1896 and 1900, the tariff sheriff.

Brad Setser, a senior fellow at the Council on Foreign Relations, noted on the social media site X that the 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 noted that the tariffs on China without exemptions could raise the price of iPhones, which would test just how much power corporate America has with Trump. Apple’s CEO Tim Cook attended Trump’s inauguration last month.

Recent research on Trump’s various tariff options by a team of economists suggested the trade penalties would be drags on growth in Canada, Mexico, China and the US.

But Wending Zhang, a Cornell University economist who worked on the research, said the fallout would be felt more in Canada and Mexico because of their reliance on the US market.

Canadian Prime Minister Justin Trudeau told Canadians that they could be facing difficult times ahead, but that Ottawa was prepared to respond with retaliatory tariffs if needed and that the US penalties would be self-sabotaging.

Trudeau said Canada is addressing Trump’s calls on border security by implementing a CDN 1.3 billion (USD 90 million) border plan that includes helicopters, new canine teams and imaging tools.

Mexico President Claudia Sheinbaum has stressed that her country has acted to reduce illegal border crossings and the illicit trade in fentanyl. While she has emphasised the ongoing dialogue since Trump first floated the tariffs in November, she has said that Mexico is ready to respond, too.

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

Trump still has to get a budget, tax cuts and increase to the government’s legal borrowing authority through Congress. The outcome of his tariff plans could strengthen his hand or weaken it.

Democrats are sponsoring legislation that would strip the president of his ability to impose tariffs without congressional approval. But that is unlikely to make headway in a 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.

Disclaimer: Moneywealth research provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.

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