The stiff duties that President-elect Donald Trump threatened against the U.S.’s neighbors and big trading partners, along with the additional tariffs he promised against China, could raise prices for Americans on everything from fresh fruit from Mexico to lumber from Canada and Chinese electronics.
Import-reliant businesses—especially automobile manufacturers—could face significantly higher costs that they would then pass on to consumers. Farmers and other exporters could face retaliatory tariffs.
Trump’s promise to impose 25% tariffs on Canada and Mexico and an additional 10% on Chinese imports on the first day of his presidency could lead to higher prices, just as the country appears to be turning a corner on inflation.
Many Americans said they voted for Trump precisely because of brutal price increases they blamed on the Biden administration.
The tariff threat upends the forecasts of many economists who have been assuming that the duties Trump will impose wouldn’t be nearly as high as what he pledged on the campaign trail.
Whether a negotiating tactic or an opening salvo in a bid to rework global trade, Trump’s tariff threat represents a ratcheting up of his rhetoric.
On Tuesday, economists at the Budget Lab at Yale reworked their estimates of how tariffs under Trump might affect the economy.
Tariffs of 25% on Canada and Mexico, and 10 percentage points added to existing tariffs on China, with those countries imposing retaliatory tariffs, would raise U.S. consumer prices by 0.75% next year, according to the Budget Lab. That estimate drops to 0.65% if households substitute purchases toward domestically produced or lower-tariff imported options. That would amount to more than $1000 in lost purchasing power per household, in 2023 dollars.
If the tariffs against Chinese goods were layered on top of the 60% Trump has already threatened, versus existing tariffs, the estimated inflationary effect would be higher. Beyond raising the prices that Americans pay for goods, higher inflation could lead the Federal Reserve to cut interest rates less than expected in the year ahead. That would keep rates on credit card balances and other loans higher than they otherwise might have been.
During the campaign, Trump said that he would place tariffs of 60% or more on Chinese goods, and tariffs of 10% to 20% on imports from other countries. In their forecasts, many Wall Street economists have been reckoning there would be stiff tariffs against China, but that other increases would be only incremental.
“We anticipate that some version of the China tariff will be implemented, but for now assume that tariffs on the rest of the world will be more limited in scope,” wrote economists at JPMorgan Chase in a year-ahead outlook published last week.
Tariffs can create winners and losers. Domestic industries that compete with lower-cost foreign manufacturers can experience greater demand for their products, while the government takes in additional revenues.
But consumers and other purchasers of imported goods aren’t able to buy as much, and both economic theory and the historical record show that they tend to lose more than the winners gain. Moreover, when a country imposes tariffs against another country, the other country often responds with tariffs of its own. Mexican President Claudia Sheinbaum on Tuesday said that Mexico would retaliate if Trump carries out his threats.
That said, the economic benefits of trade don’t fall across the country equally, and Trump’s successful 2016 and 2024 campaigns tapped into the frustrations of Americans who felt they were at the losing end of trade with China, in particular. President Biden sharply raised tariffs on electric vehicles and an array of other products from China.
Trump voter Rafael Garcia said Tuesday he felt blindsided after hearing about the incoming president’s plans to impose tariffs on Mexico and Canada. “I thought we were all in agreement that he was imposing tariffs on other countries,” the 56-year-old said of his belief that they would be concentrated on China. “I am concerned. We don’t know if the economy is going to continue growing.”
Still, he said the knowledge wouldn’t have changed his decision at the polls. “I still trust his decisions and how he’s going about things,” said Garcia, who works in road safety in Miami.
Garcia isn’t particularly concerned about how his household budget could be affected. Though he acknowledges his tequila habit might suffer. “Instead of three shots, I may have one,” he joked.
Nancy Burrell, a 76-year-old retired librarian in Zionsville, Ind., who voted for Trump said she knows that tariffs could raise prices. But she wants to trust the administration to reverse course if that starts to happen.
“I’m not particularly worried about it,” said Burrell. “We’ve already been living under price pain. Is inflation going to be worse than it already is? I doubt it.”
American consumers will feel price increases not only after the tariffs are imposed but also in the run up, as stores and businesses rush to preorder nonperishable goods, said Kimberly Clausing, an economist at UCLA School of Law. Lumber from Canada is an example of how that would play out.
“If I were a lumber yard, I’d be placing big orders today. Those extra orders will drive up prices,” said Clausing. Among the ripple effects of lumber prices will be high bills for American households planning home renovations.
Some consumers were also trying to front-run possible tariffs. In Boynton Beach, Fla., Rochelle Satchell said she was holding off on upgrading her iPhone with a cracked camera until her plan was due for renewal, but is now planning to eat the upgrade penalty to get it done before Trump takes office. “It’s going to be 10 times higher come next year,” said the 61-year old, who voted for Harris.
Precisely how tariffs affect consumer prices could vary, economists say. On the one hand, both U.S. businesses and the importers they purchase from might absorb some tariff costs. On the other, there could be a ripple effect, as competing suppliers outside of Canada, Mexico and China take advantage of the opportunity to raise prices.
The Peterson Institute for International Economics, a think tank in Washington, D.C., estimates that under Trump’s new possible tariffs, prices would rise by 1%. It additionally estimates that by 2026 gross domestic product would be 0.6% lower than it otherwise would have been, and that total U.S. employment would be 1% lower.
Border communities like Laredo, Texas, could see its unemployment rate soar to the double digits, says Marcus Noland, a senior fellow at the Peterson Institute. “That’s where the trucks cross the border. If the jobs are to intermediate trade and there’s no trade, they are going to be out of work,” he said.
Employment in agriculture would be hard hit, too, according to the analysis, coming in 3.1% below where it would have otherwise been. Employment in durable manufacturing—the building of cars and other long-lasting goods—would be 5.4%.
Automakers, in particular, might be at risk. They have become reliant on a network of factories and parts suppliers that span the U.S., Mexico and Canda since the North American Free Trade Agreement came into effect 30 years ago, followed by its successor, the United States-Mexico-Canada Agreement.
Tariffs of 25% on imports from Mexico and Canada could add $3,000 on average to the price of a car, according to analysts at Wolfe Research. The firm estimates that about $97 billion worth of auto parts are imported to the U.S. from the two countries each year, and four million vehicles are shipped in—about three million from Mexico and one million from Canada.
Added costs from the potential levies also would hammer the bottom lines of General Motors, Ford Motor and Jeep-maker Stellantis, which all produce vehicles south of the border and rely on parts shipments from there. Evercore ISI estimates a 50% reduction in earnings per share for GM and Stellantis, and 25% for Ford. Shares of all three companies fell on Tuesday, with GM’s stock shedding about 9%.
The National Retail Federation said the timing of the proposed tariffs in January would have an outsize impact on fresh fruits and vegetables, of which the U.S. sources less at that time. U.S. importers will pay 25% more on $10 billion worth of Mexican avocados, tomatoes, raspberries, strawberries and peppers alone; and a 25% tax on $10 billion worth of Mexican beer, tequila and mescal imports, said David French, senior vice president for government relations at the industry group.
Tara Lee, owner of A Ruff Joint pet grooming in Knoxville, Tenn., is worried about tariffs straining her business. She knows she will have to increase her fees if prices surge for supplies like hair brushes and towels, which she buys via Amazon from what she believes are Chinese brands, and worries that customers who are already stretched thin will stop paying for a nonessential services.
“They’re not going to have extra money to pay for grooming, and even if they still have to get their dog groomed they are going to start stretching that out from six weeks to eight or 10,” said Lee, who is 50 and voted for Harris.
Write to Justin Lahart at Justin.Lahart@wsj.com, Chao Deng at chao.deng@wsj.com and Rachel Wolfe at rachel.wolfe@wsj.com
