The tariffs could raise living costs for American families by $1600 to $2000 annually.
Economists warn these policies may shrink the US economy by nearly 3% per year.
Donald Trump has turned decisively against America’s traditional allies, cutting off aid to Ukraine, ramping up tariffs on imports from Mexico and Canada and threatening more for the European Union too.
From today, most goods crossing America’s northern and southern borders will incur a tax of 25%, and those shipped from China will be hit with an additional 10% levy – on top of the 10% imposed last month. A 25% tax on EU exports of cars and other goods is likely to follow.
These aggressive economic policies are couched in the language of victimhood, as the US President complains that the world has unfairly treated the US and that he is the man to restore justice to the global order.
But in fact, many economists take the view that America has done very well out of the existing global order – and fear that Trump’s own plans are about to deal a brutal blow to both his country’s economy and more specifically, his own voters.
Factory orders are already falling and surveys suggest a drop in confidence. Central bankers in Atlanta this week slashed a closely watched economic forecast and now fear the US economy is shrinking at a pace of almost 3% per year.
“The United States has been ripped off by virtually every country in the world. We are going to change it. It has been unfair,” Trump said when promising more tariffs are on the way.
“We’ve been helping everybody for years and to be honest I don’t think they appreciate it. So we are going to change that. We are going to change it fast. We are going to make America great again. We have to focus on our country.”
It is hard to see much obvious impact of this claimed unfairness. America’s economy has boomed in recent years.
Compare the US with other big Western economies. At the end of 2024, America’s economy was 12.1% bigger than it was at the end of 2019, on the eve of the pandemic. Over the same period Canada grew 7.7%, France 4% and the UK 3.2%. Germany shrank 0.1%.
That does not look like a country which is being ripped off. In fact, largely under Joe Biden, America thrived.
Source: House of Commons Library, OECD, ONS
In a great irony, this boom is now in peril thanks to the man who claims he alone can “make America great again” – for tariffs are a tax on his own people.
The new tariffs take total border taxes to their highest level since 1943, according to analysts at Yale. It means American businesses and households face the highest levy on the things they want to buy from abroad in more than 80 years.
They buy a lot. Last year Americans imported goods worth US$413 billion ($730b) from Canada, US$439b ($776b) from China and US$506b ($894b) from Mexico, according to the Office of the US Trade Representative.
Ramping up taxes on these goods is poised to add 1% or more to prices, or US$1600 ($2826) to US$2000 ($3533) to the typical family’s living costs, say the economists at the university’s Budget Lab.
Anyone buying computers or electronics is in for a shock: those prices are predicted to rise by more than 10%. Clothes prices will rise by an estimated 7.5%, cars 6.5%, natural gas 5% and fruit and veg 2.9%.
Source: The Budget Lab, Yale University
That is a direct assault on living standards, and means households have less money to spend elsewhere.
The result will be a 0.6 percentage point hit to economic growth this year, Yale analysis indicates, and a 0.3pc to 0.4pc blow to the economy in the long run – meaning US output will be around $100 billion ($176b) smaller each year than it would have been without the tax raid.
If China, Mexico and Canada retaliate, America will be among the bigger losers of the trade war, according to the National Institute of Economic and Social Research (NIESR).
It estimates that America’s growth rate will take a knock of more than 0.4 percentage points this year and almost the same again next year. That is much worse than the impact on China, which is set for a hit of less than 0.1 percentage points each year, but a touch smaller than the hit faced by Mexico.
NiGEM simulations
Far harder-hit is Canada, with an estimated blow of around 0.8 percentage points off growth each year.
When it comes to the hit to consumers – who pay more because tariffs are a tax on the things they want to buy from abroad – NIESR expects inflation in the US to be more than one percentage point higher this year as a result, with a similar impact in Mexico, and smaller increases in living costs in Canada and China.
NiGEM simulations
There are plausible “winners” from the tax, but they pale in comparison to the losers, even within the US.
Factories in America producing steel and aluminium – commodities which are broadly indistinguishable between manufacturers – will benefit as their competitors are put at a disadvantage by tariffs. But that benefit comes at the cost of their customers, and the wider manufacturing industry in America.
Elsie Peng, at Goldman Sachs, estimates the cost just to producers – even before considering consumers – is a loss of 0.2% of America’s industrial output.
“The largest beneficiaries are primary steel and aluminium manufacturing and raw material processing, while the industries hurt most would be those specialising in production of secondary materials such as manufacturing of steel and aluminium products, petroleum and coal products, and pharmaceutical products, all of which would face significant increases in input costs.”
The other winner is the US Treasury. Yale’s Budget Lab estimates that tariffs could raise up to $1.5 trillion ($2.64t) of tax receipts by 2035, but also hit growth to lose $360b ($633b) of revenues from other sources.
Investors sounding the alarm
There are signs the economy was already grinding to a halt before the tariffs came into force.
America’s factory bosses, nominally the big beneficiaries of taxes on their foreign competitors, are fearful.
The purchasing managers’ index, a survey of manufacturers by S&P Global, showed an increase in activity in February. Yet part of this came from factories buying up materials while they could before the tariffs struck, says Chris Williamson, the chief business economist at S&P Global Market Intelligence.
“Production and purchasing were often buoyed by companies and their customers building inventory to beat price hikes and supply issues caused by tariffs. Exports have meanwhile slumped and supplier delivery delays were the most common since October 2022 amid disruptions to trade caused by tariff worries.”
Investors are sounding the alarm too.
Even at the Saudi-funded Future Investment Initiative (FII) summit in Miami last month – a love-in between Republicans and Saudi Arabian investors, where the President gave a warmly received in-person address for more than an hour – there were warnings over the economic and political outlook in the US.
“How do you filter the facts from the truth, the statements from the lies?” said one international asset manager.
“I’m questioning where interest rates will be at the end of the year – I think they will be closer to, if not north of 5%. And I’m questioning who is going to be buying the zillions of public debt that he is going to have to issue to cope with his programmes?” the asset manager said.
Trump’s seesawing tariff policies have raised huge cost uncertainties for businesses operating within the US, as has the prospect he risks sending the Government’s budget deficit ballooning further – with an expensive combination of lower taxes, other than tariffs, and weaker economic growth.
Jenny Johnson, the chief executive of asset management firm Franklin Templeton, warned on stage at the conference: “Nobody has to talk about [government debt] as long as it works. But when it doesn’t, it suddenly really becomes a crisis.”
Rising yields on government debt will take a heavy toll on the wider economy, she said.
“It’s not that it’s a risk to the reserve currency, but it starts to crowd out other investments and then it becomes a vicious cycle. I think the 10-year rate might be 5% by the end of the year, that becomes attractive and then you pull money away from other investments,” Johnson said.
Economists at the Federal Reserve Bank of Atlanta track each data point for their “GDP nowcast”, which seeks to track the economy’s performance in real time.
Until late last month, they thought the US was on track for another solid expansion, growing at an annualised rate of around 2.5% for the first quarter of the year.
The central bank analysts now think the economy is shrinking at a pace of 2.8%, a catastrophic reversal, as households and businesses slam the brakes on consumer spending and private sector investment.
The impact will not be felt in America alone. When the world’s biggest economy suffers, so does the rest of the world, as demand for goods and services shrinks.
Effectively a slump in America supercharges the impact of tariffs by further undermining other nations’ exports, while retaliation by other nations in turn hits growth on both sides by ramping up the cost of buying goods from the US.
NIESR estimates that a 10% tariff on the rest of the world – lower than the 25% mooted for the EU – with retaliation would wipe more than 5% from global trade and 2% from global GDP, including a 0.7 percentage point blow to UK growth this year.
“Policies so far suggest that Trump is not going to stop here, and further tariff increases and broader coverage seem likely. A full-scale tariff war could have a ripple effect across global trade, impacting supply chains, businesses and households worldwide,” says Ahmet Kaya, economist at NIESR.
“Even the UK, despite not being directly targeted, may feel the fallout through indirect economic effects. These findings send a clear message: tariffs not only fail to achieve Trump’s intended aims but also backfire and harm the US and US allies instead”.
