Q&A of the Day – What Will the Impact of Trump’s Tariff’s Be?
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
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Today’s Entry: @brianmuddradio What will the impact of tariffs be? Do you think they’re a good thing or will they be an inflation issue?
Bottom Line: Promises made, promises kept is a familiar theme and saying of the Trump administration. On Saturday President Trump delivered on one of those promises. Specifically, that if he didn’t see Canada, China and Mexico taking substantive action to reduce the flow of illegal immigration and illegal drugs into our country – he'd respond with tariffs. As was stated by President Trump in the issuance of the order:
<<The extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl, constitutes a national emergency under the International Emergency Economic Powers Act (IEEPA).
- Until the crisis is alleviated, President Donald J. Trump is implementing a 25% additional tariff on imports from Canada and Mexico and a 10% additional tariff on imports from China. Energy resources from Canada will have a lower 10% tariff.
- President Trump is taking bold action to hold Mexico, Canada, and China accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country.>>
So basically, the ball is in their court and that’s important in addressing today’s question because even if we could pinpoint what the impact of these tariffs would be over a particular period of time (which isn’t so easy to do), we don’t know what the length of these imposed tariff’s will be. Will these countries blink and deliver President Trump the changes he wants to see perhaps as soon as this week or could this play out indefinitely? Now, with that said in Trump’s fact sheet explaining his rationale he had this to say about the economic case to be made:
- <<Access to the American market is a privilege. The United States has one of the most open economies in the world, and the lowest average tariff rates in the world.
- While trade accounts for 67% of Canada’s GDP, 73% of Mexico’s GDP, and 37% of China’s GDP, it accounts for only 24% of U.S. GDP. However, in 2023 the U.S. trade deficit in goods was the world’s largest at over $1 trillion.>>
So clearly the economies of these countries are more levered to trade into the US than our economy is to them. Here’s the first breakout I have for you:
- 77% of Canada’s exports are to the US – 17% of US exports are to Canada
- The US accounts for 60% of Mexico’s exports – Mexico accounts for 15% of US exports
- 16% of China’s exports are to the US – China accounts for 7.5% of US exports
This illustrates just how much more levered each of these countries is to the US than the US is to them. So, the first answer is that whatever the impact of these tariffs is in this country, you can multiply that effect for these countries. Here’s another way of looking at this 48% of all imported goods into the US come from one of these countries. Now, how much of the stuff we buy is imported? You might be surprised.
Only 15.6% of the US GDP is derived from imported goods which means that the tariffs President Trump placed on Canada, China and Mexico impact only 7.5% of the US economy. I’m not sure how that might square with your thinking about this, but my guess is that it’s probably considerably lower than you might have thought. As for the economic impact?
If you read any related stories in mainstream media about these tariffs, you’ll come across concerns about inflation. It turns out that Trump tariffs are the one form of taxes those outlets don’t seem to like. Nevertheless... The risk of increasing inflation and potentially negatively impacting the US economy isn’t nothing. But you may recall that we heard similar fears when President Trump instituted tariffs on China and Mexico during his first administration and the fears expressed by these outlets and their experts didn’t materialize. That was largely because what we saw instead was an increase in US manufacturing that picked up the pace to fill the space from what wasn’t being imported. It’s possible we could see that take place yet again.
The inflation rate the day Trump became president in 2017 was 2.5%. The inflation rate the day he left office in 2021 was 1.4%. Also, at no point during his presidency did the inflation rate rise to a rate higher than what he inherited. This is likely not lost on team Trump in this geopolitical and economic calculation. What’s more, is that when it comes to inflation the biggest inflationary pressure has been housing. We’re about to see significant deflationary impacts of the Trump administration's illegal immigration policies that should well more than offset anything we’d see from these tariffs. I’ve already had a listener ask me to break down the Trump administration's deportation plans and the impact on housing, so I’ll plan to do so as a follow up to this story – tomorrow.