Here we go again. Earlier in the week, the Trump administration slapped a new round of 25 percent tariffs on Mexico and Canada, a 10% tariff on energy products from Canada, and an additional 10% tariff on goods from China, all of which were supposed to go into effect on February 4.
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Within days, the tariffs on Mexico and Canada were put on ice for 30 days, amid ongoing negotiations. The Chinese tariffs went into effect and soon after, the Chinese government said it would retaliate with their own set of tariffs on U.S. goods that will go into effect on Feb. 10.
U.S. importers of Canadian oil and timber, Mexican agricultural products and auto parts, and Chinese electronics and appliances are bracing for a volatile period ahead and importers of computer chips, pharmaceuticals, steel, aluminum, copper, oil and gas imports are getting ready for a separate round of tariffs, potentially aimed at the European Union, that could come in mid-February.
As details develop, pour some tequila and grab your last bit of guacamole… it’s time for a quick tariff Q&A:
What is a tariff?
A tax or duty imposed on a particular class of imports or exports (in this case, imports).
Who pays for a tariff?
The company that imports the goods is on the hook for the extra charge (importantly, the exporting country does not pay for the tariff!) The importer may choose to absorb the extra cost, reducing its profit, or pass it along to consumers.
How does this round of tariffs compare to the 2018 tariffs?
The current tariffs are 3.5 times BIGGER than the first round of Trump tariffs. This year’s tariffs will impact $1.4 trillion worth of goods, compared to $380 billion worth of goods in 2018.
How can tariffs push up inflation?
If importers pass along the cost of tariffs to their customers, then prices could rise for those goods. The scale, scope and duration of this round of tariffs could push the inflation rate higher than the current 2.9% level. Most economists believe that the annual inflation rate could rise to 3.5%, though most agree that we are not likely to see anywhere near the 9.1% inflation rate recorded in mid-2022.
How can tariffs impact the economy?
In addition to higher inflation, tariffs might cause affected U.S. importers to lay off workers and could lead to a slowdown in economic growth, though the overall impact (which now, economists estimate will be a 0.2-0.5% reduction in the current 2.5% GDP pace), will be determined by the length of time tariffs remain in place. For Canada and Mexico, the tariff tit for tat could push both of those economies into a recession.
Is there anything positive about tariffs?
Tariffs can be used as a bargaining chip in international negotiations (in this case, the administration noted that using tariffs is “a tool to secure our borders against illegal migration and combat the scourge of fentanyl”); as a means to beef up tax revenue; and as a way to shield domestic producers from foreign competition.
How do tariffs impact the Federal Reserve?
At its recent meeting, the Federal Reserve took no action, as officials described the economy as expanding “at solid pace,” but inflation is running at 2.8%, above the desired 2% target.
As a result, the central bank could afford to be patient. With the announcement of tariffs, future measures and the expected retaliation, Paul Ashworth of Capital Economics believes that “the window for the Fed to resume cutting interest rates at any point over the next 12 to 18 months just slammed shut.”
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Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com.
