Since the 17th century, the U.S. government has used tariffs to protect domestic goods from foreign competition. However, in 1934, the country shifted gears with the Reciprocal Trade Agreements Act. This law sought to boost international trade and make it easier for the U.S. to export goods by lowering tariffs. But it looks like there’s been a change in direction. New tariffs, both broad and country-specific, are challenging this free trade approach, suggesting a move back towards protectionist policies.
Overview of Trump Tariffs
U.S. President Donald Trump issued three executive orders on February 1, 2025, to impose ten- to twenty-five-percent tariffs on Canada, Mexico, and China. The President also announced plans to impose tariffs of twenty-five percent on imports from the European Union. Executive orders to raise tariff rates on steel and aluminum from ten percent to twenty-five percent were also passed on February 10, 2025, with upcoming tariffs scheduled for auto imports, pharmaceuticals, and semiconductors.
How Trump’s Tariffs Could Impact Prices
Tariffs are taxes paid by the country importing products to the country exporting the goods. While tariffs are major sources of revenue for the U.S. government, revenue earned can be lower than projected if other countries retaliate with trade tariffs.
U.S. tariff announcements and retaliatory tariffs from other countries may cause temporary volatility in the stock and forex markets. Investors experienced in MT4 trading have quick access to market news and are better equipped to assess the implications of new tariffs on the financial markets.
These tariffs can also lead to disruption in supply chains with a marked increase in the price of consumer goods. A study estimates Trump’s new proposed tariffs could lower the incomes of Americans from around four percent to two percent, leading to a typical middle-income household losing $1,200 each year.
In the long term, imposing tariffs can increase the risk of recession. Recession is more likely to occur when consumer spending reduces drastically, leading to lower economic activity. With sixty-eight percent of the U.S. GDP derived from consumer spending, trade tariffs can trigger a rise in the prices of goods and services, reducing economic growth in the country.
Effect on Inflation
Trump’s tariffs on China, Canada, and Mexico, the United States’ largest trading partners, could potentiate disruptions in the corporate supply chain pipelines. Changes to import tariffs pose significant threats to businesses due to the scarcity of raw materials and products. Inflation rates tend to rise, with businesses spreading additional costs from alternative supplier sourcing on product pricing.
Although previous tariff increases did not alter economic activities to a large extent, the current economic climate could extend the impact, leading to inflation spikes and lower consumer purchasing power. Trade tariffs have also historically proven to drive inflation, placing upward pressure on treasury bills as investors take advantage of the price change. Treasury yields have surged following Trump’s election, reflecting investors’ concerns about trade tariffs.
While President Trump aims to keep inflation levels down, incessant tariffs could cause inflation to rise above the two percent Federal Reserve’s target. In the event of rising inflation rates, the Fed may intervene by raising interest rates, potentially rattling the financial market.
Impact on Jobs
One of the motivations behind Trump’s tariffs on other nations is how U.S. manufacturers outsource jobs to countries to lower labor costs. The decline in U.S. manufacturing jobs increased rapidly following the signing of the North American Free Trade Agreement (NAFTA) with Mexico in 1994 and the entry of China into the World Trade Organization in 2001.
Other factors, like automation and other technological advancements, may have also contributed to the declining employment rate in the manufacturing industry. According to a study by some economists, Trump’s steel tariffs in 2018 led to more job losses than gains, raising doubts about the positive impact of upcoming tariffs on the manufacturing sector and the job market.
Impact on Trade Deficit
Reducing the U.S. trade deficit, which accounts for the difference between exports and imports, is one of Trump’s priorities in his second term in office, yet history proves raising tariffs may sabotage the goal. When Trump assumed the presidential office in 2016, the U.S. trade deficit was $480bn, increasing by thirty-six percent to 653bn by 2020 when he left office, signaling a weak correlation between raising tariffs and lowering the country’s total goods and services deficit. Businesses are importing massively pending the implementation of some of Trump’s tariffs. As a result of businesses trying to evade additional taxes on imports, U.S. imports hit a record high last December and have risen by eight-point-four percent since Trump assumed office.
The Uncertain Impact of Trump’s Tariffs
Current economic events do not reflect any positive impact of Trump’s tariffs. The U.S. trade deficit is higher than before, inflation has increased, and consumer spending is lessening. Although some tariffs have yet to be fully implemented, investors and businesses are responding to the upcoming taxes by expanding imports before taxes surge due to tariffs. The President maintains his stance on imposing trade tariffs as the long-term strategy for building the U.S. economy, even though it might lead to some economic strain in the short term.
