T-Day Is Coming. What Will Tariffs Do To The Economy?

Deadlines for President Donald Trump’s sweeping tariffs are rapidly approaching, with unpredictable effects on the economy should they be put into place.

First, on March 4, the U.S. is set to impose a 25% tariff on products from Canada and Mexico. Then, on March 12, the U.S. will start charging a 25% tariff on imported steel and aluminum. On April 1, the Commerce Department is due to give Trump a report on setting reciprocal tariffs retaliating against other countries that have set trade barriers against U.S. products. On top of that, Trump set an April 2 date to announce 25% tariffs on autos, semiconductors, and pharmaceuticals.

Financial market participants are scrambling to guess whether the tariffs will go into effect as planned, whether they’ll be delayed or watered down, and to what extent they’re just a negotiating tactic to win economic and political concessions from the affected countries.

Tariffs against Mexico and Canada were supposed to go into effect in February. However, Trump delayed their implementation by a month after both countries announced they were improving border security against drug smuggling and illegal immigration. On Monday, Trump said the delayed tariffs would be implemented “on time, on schedule.”

Why Worry About Tariffs?

Forecasters expect significant effects on the U.S. economy, the magnitude of which will depend on the tariffs’ levels and the number of products affected.

Trump and his allies say tariffs will encourage companies to manufacture products in the U.S. instead of overseas, help American companies, and even raise enough revenue so that the country will no longer need an income tax or the IRS.

Mainstream economists cast doubt on those claims. Many forecasts expect the tariffs to drive inflation by pushing up consumer prices while also slowing down growth, raising risks of an economic double-whammy known as “stagflation.”

An analysis by economists at Morgan Stanley last week assumed Trump’s fresh round of tariffs would first push up prices and, later in the year, cause consumers to buy less stuff and slow down economic growth significantly.

The Outlook is Unclear

The Morgan Stanley economists predicted the economic slowdown would be more significant than the price increases. That would cause the Federal Reserve to cut interest rates in response, trying to stimulate the economy and prevent a downturn.

By contrast, economists at Nomura predicted Trump’s trade policies would push core PCE inflation significantly over 3% by midyear, causing the Federal Reserve to delay lowering interest rates until 2026.

Those forecasts and several others noted the outlook is uncertain, given it’s unknown exactly what tariffs will be enacted and how the targeted countries might retaliate. Plus, the economy hasn’t always reacted to changes as economists have anticipated in recent years.

For example, the surge of inflation after the pandemic caught forecasters, including those at the Fed, by surprise because many had assumed price increases would be “transitory” and diminish quickly. Instead, when COVID-19 disrupted supplies of critical components, including computer chips, the effects rippled far and wide through a global supply chain that had become more complex than economists had realized, as Austan Goolsbee, president of the Federal Reserve Bank of Chicago, noted in a recent speech.