Trump's inflation

Inflation appeared to be largely under control in the latter half of 2024 but has returned to the spotlight as the world braces for Trump 2.0. As was the case during his first term, President Trump is bringing a significant amount of disruption and uncertainty to the global order.

While Americans await his inauguration, world leaders are scrambling to develop strategies to counter the incoming president’s proposed policies, with tariffs emerging as a major concern. The renewed concern over inflation centers around these tariffs, following Trump’s announced plans to impose blanket tariffs of 10% to 20% on all imports. According to Trump, these tariffs will be paid by the countries targeted by the policy.

“I am today announcing that I will create the EXTERNAL REVENUE SERVICE to collect our Tariffs, Duties, and all Revenue that come from foreign sources. We will begin charging those that make money off of us with Trade, and they will start paying, FINALLY, their fair share. January 20, 2025 will be the birth day of the External Revenue Service”.

In reality of course, there is not much external about the revenue generated by tariffs as these additional costs will fall on the importer, that is, American households and businesses. While tariffs will also hurt foreign producers by making their product less cost effective for American consumers, they are ultimately a tax on import, hence a tax on American buyers.

Considering that President Trump has access to some of the world’s top economists, it is clear that such claims are not made out of ignorance. Instead, they appear to be crafted to exploit the lack of understanding among his supporters, obscuring the true economic burden of these policies.

In addition to burdening American consumers and reducing household disposable income, the expected retaliatory tariffs from U.S. trade partners will target key U.S. industries, further impacting Americans' earnings. Regardless of how strategic Trump and his supporters consider this approach, it’s difficult to identify any true winners.

Like many other countries, Canada is bracing for the impact of U.S. tariffs on its economy. Given that President Trump renegotiated the North American Free Trade Agreement (NAFTA) during his first term to be more “balanced”, some may have expected that Canada will be spared this time around from tariff talks. But the incoming president has vowed to punish Canada with 25% tariffs, initially citing weak border security, although daring to have a trade deficit with the U.S. likely has a lot to do with it.

As Canadian officials plan retaliatory tariffs, Canadians should expect to bear the cost. With many households still grappling with elevated prices following the pandemic, additional price increases driven by a trade dispute would further add to the strain on Canadian households.

When discussing tariffs, it is important to be clear about the goal as well as the consequence. If the U.S. aims to bring back manufacturing jobs by making foreign goods more expensive, it is doubtful how successful it will be. With the cost of production in the U.S. being so high due in large part to higher wages for American workers, any shift in manufacturing back to the U.S. will be mostly automated. While American households will broadly bear the cost of tariffs, the wins of this strategy will accrue to the top of the income distribution.