A whirlwind two weeks for the Trump administration’s negotiations on tariffs has left economists forecasting the good and the bad that lies ahead for America’s financial health.
One such economist and senior fellow from the American Enterprise Institute (AEI) – where National Economic Council director Kevin Hassett previously worked – expressed concerns that President Donald Trump’s tariff strategy could work against what fortitude he brings to the economy.
“I don’t think there’s any doubt, at least in my mind, that a 25% tariff on imports from Mexico and Canada would have severe negative economic consequences,” AEI’s Michael Strain told Fox News Digital.
“The economic effects of these tariffs are pretty clear that they would hurt workers, that they would hurt households, that they would hurt businesses and that they would hurt the economy overall,” he added, before acknowledging some optimism ahead with “a number of aspects of President Trump’s agenda.”
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“Including his plans to increase domestic energy production, including his goals to make the United States solidify its position as a global leader in artificial intelligence technologies. So these are all things to be excited about. If President Trump launches a trade war with Canada and Mexico, if he launches a trade war with the European Union, then that will work against his goals. That will weaken the American economy, that will increase the cost of living facing Americans, and that will make American businesses less competitive.”
Hours before a midnight deadline, both Canada and Mexico barely escaped their 25% tariffs by agreeing to certain border security stipulations with Trump for a 30-day pause. However, a 10% tariff on China that turned into a retaliatory levy did go into effect, and an anticipatory negotiation call has yet to happen between Trump and Chinese President Xi Jinping.
Monday evening, Trump imposed a 25% tariff on steel and aluminum set to take effect on March 12. The move hopes to allow local U.S. producers to work without intense global competition, likely impacting European Union nations most.
“The goals that he’s hoping to achieve with the threat of tariffs on Mexico and Canada are different than the goals he’s attempting to achieve with tariffs on China,” Strain said while pointing out this is the first time in U.S. history that a president has threatened allies with “enormous” tariffs to make political concessions or change behavior.
But the economist argues that, traditionally, tariffs raise prices consumers pay for imported goods and parts, contribute to inflation and make domestic manufacturers less competitive on a global scale.
“If they’re scheduled to go into effect and if businesses believe that they will go into effect on the day that they’re scheduled, then American consumers would see price increases very, very soon, in a matter of days,” Strain said.
“I think many Americans are quite concerned about the effect that these tariffs would have on their household finances. And they should be,” he continued. “Their groceries will be more expensive, many products that are made in America that they would buy will be more expensive, their automobiles would be more expensive, and this would reduce the purchasing power of their wages and incomes. And it would hit their pocketbooks.”
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A recent analysis from researchers at Yale found that, if enacted, Trump tariffs would create a $1,170 income loss. Additionally, a Fox News poll conducted from Jan. 10 to 13 found that a majority of Americans expect tariffs will hurt the U.S. economy.
Some trade groups and Democrats have sounded the alarm over Trump waging a worldwide trade war, and to some extent, the AEI economist agrees.
“I think our trade war with China, which President Trump started, has escalated a bit. When President Trump threatened Canada and Mexico with big tariff increases, Canada responded by saying that they were going to put tariffs of their own on certain critical U.S. exports, and that, I think, meets the definition of a trade war,” Strain said.
“In President Trump’s first term… he significantly increased tariffs on Chinese imports. China retaliated by increasing its tariff rates on U.S. exports of agricultural products to China. And that hurt the U.S. agriculture sector so severely that President Trump had to offer subsidies to farmers to make up for the effects of Chinese retaliation. If President Trump and Canada had continued on the path they were going,” he expanded, “something similar might have happened as well.”
On a larger scale, Trump has stated that the tariffs provide a way to bring America back to an economic “golden age” before the federal income tax was invented. But funding the government entirely on tariffs could be a challenge, according to Strain.
“It is completely unrealistic to argue that the U.S. could replace the income tax with an increase in tariffs. There’s just not enough money in taxing imports. In order to make up for the money, we would lose by eliminating the income tax,” the economist said.
A better solution, he noted, could be taxing income less and consumption more: “But a consumption tax would have to be structured so that it didn’t only target imports. Again, there’s just not enough money there. And if you only target imports, that’s quite distortionary; you’d want to have a more broad-based consumption tax.”
Overall, America’s economy “is in really strong shape,” and the Federal Reserve still has work to do to reach its inflation goals, Strain noted, while emphasizing the “things to be excited about” on Trump’s agenda could outplay a tariff game.
“I hope that four years from now, tariff rates are lower than where they are today. My concern is that the Trump administration might have to put its hand on the hot stove of high tariffs to learn firsthand the economic damage that tariffs, which are as high as the president is discussing, can do to American consumers, households, and businesses.”
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