Following his inauguration on Monday, President Donald Trump set his sights on a dramatic restructuring of global trade, with an aim to impose significant tariffs on key trading partners — Canada, Mexico and the European Union among them.
These actions mark a continuation of his campaigning on an “America First” agenda, aiming to reduce trade deficits and boost domestic manufacturing. The rollout and potential impacts of these tariffs, however, have instilled a mix of optimism and uncertainty into global markets.
Tariffs delayed as strategy comes into focus
On his first evening in office, Trump announced plans to impose tariffs of up to 25% on imports from Canada and Mexico, citing concerns over immigration and trade imbalances. While these tariffs were initially set to commence immediately, no tariffs were implemented on Day 1, granting a stay of execution to foreign markets and jittery stakeholders.
Instead, Trump stated that he was considering Feb. 1 as a deadline for tariffs against Canada and Mexico, directing federal agencies to evaluate existing trade policies and assess compliance with recent trade agreements like the U.S.-Mexico-Canada Agreement (USMCA).
Jan Hatzius, chief economist at Goldman Sachs, remarked that Trump’s initial comments regarding trade and tariffs came across as “more benign than expected.” This notably softer pivot may reflect an underlying intent to leverage tariffs as a bargaining tool, aiming to extract favorable concessions without causing shockwaves through global trade dynamics.
Indeed, Stephen Miran — now Trump’s nominee to chair the Council of Economic Advisors — previously advocated for wielding the threat of tariffs without guaranteeing their implementation. The currencies of Canada and Mexico depreciated in response to the recent tariff discussions, reflecting investor apprehension about the economic implications of higher trade barriers. The relationship between tariffs (whether possible or actual) and the devaluation of foreign currencies is one that Miran termed “currency offset.” Currency offset, Miran argues, should minimize any inflationary impact to the consumer that Trump’s tariffs are feared to inflict.
Economists express concern
Economists polled by The Wall Street Journal have raised concerns that these tariffs risk reigniting inflation [article behind paywall], with consumer prices now projected to rise by a yearly 2.7% in December 2025. This forecast, should it come to pass, would potentially force the Federal Reserve to interrupt its cutting cycle with a return to interest rate hikes. Such inflationary forecasts are partially linked to elevated import costs due to the tariffs, which are likely to impact a broad range of economic sectors, from manufacturing to consumer goods.
For instance, an increase in import costs can cause a cascading effect, driving up prices of locally manufactured goods that rely on imported components. As a result, higher production costs often translate into higher retail prices for consumers, stretching household budgets and reducing disposable income. These economic dynamics create a feedback loop where price increases in one sector can propagate through supply chains, ultimately contributing to generalized inflation.
Industries heavily reliant on imported raw materials, such as construction and automotive manufacturing, would be particularly vulnerable to this cycle. The tariffs could lead to significant increases in the cost of building materials and vehicle components, which might, in turn, be passed on to consumers as higher retail prices. This ripple effect could contribute to a slowdown in consumer spending — the engine responsible for three-quarters of the U.S. economy — as individuals and businesses tighten their purse strings in response to price increases.
The inflationary pressures introduced by these tariffs hold the potential to complicate monetary policy, as the Federal Reserve weighs the consequences of inflation against other economic indicators. The need to curtail inflation might prompt the Fed to raise interest rates more aggressively than anticipated, thereby increasing borrowing costs for consumers and businesses. Such a move could further dampen economic activity by making credit more expensive and less accessible, affecting everything from home loans to business investments.
Europe readies contingencies
The EU has responded to Trump’s tariff threats by seeking to protect its own industries and prepare for potential retaliation. With the U.S. being the EU’s largest trading partner, any imposition of tariffs could significantly damage the bloc’s economy and its exports to the United States.
EU officials are considering a range of responses, including tariffs targeting products from politically sensitive U.S. states, as seen in past retaliations against U.S. steel and aluminum tariffs. Moreover, the EU aims to strengthen its trade with other regions, as a recent deal with Mexico indicates. This deal, a revision to their existing agreement from 2000, would see Mexico remove its tariffs on European goods like wine in exchange for heightened EU investment in Mexico.
The possibility of a trade war thus looms if retaliatory tariffs are imposed by affected countries. Such a scenario could lead to a decline in global trade volumes, increased costs for businesses and strained international relations. Ongoing negotiations and strategic responses from trading partners like the EU will play a crucial role in determining the future trajectory of U.S. trade policy.
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