By Lindsay Wise
WASHINGTON -- President Trump's aggressive move to place tariffs on hundreds of billions of dollars in imports, ranging from crude oil and auto parts from Canada to Mexican avocados and raspberries has rattled investors, economists and some lawmakers, who are all wondering: What exactly is the goal?
Larry Summers, the former U.S. Treasury secretary under President Bill Clinton, said that Trump's move amounted to "a self-inflicted supply shock." Kentucky Republican Sen. Rand Paul said: "Taxing trade will mean less trade and higher prices." The head of the National Association of Manufacturers, Jay Timmons, said it put American jobs at risk. "The ripple effects will be severe," he said.
For many of those reasons, tariffs were the part of Trump's economic plan investors disliked the most. Markets have cheered Trump's promises of tax cuts and reduced regulation, but he has vaulted his trade plan ahead of virtually everything else.
Other countries have already moved to retaliate, and Trump acknowledged on Sunday that there could be some "pain" for U.S. consumers.
Canada is planning tariffs on $100 billion of goods, including alcohol, shoes, steel and aluminum and aerospace products. China, which also faces new U.S. tariffs, and Mexico prepared similar counterattacks.
Trump defended his tariffs, saying in an all-caps post: "Will there be some pain? Yes, maybe (and maybe not!)" He added that "it will all be worth the price that must be paid," and repeated a call to turn Canada into America's 51st state.
Republicans over the weekend were largely supportive of Trump's efforts. "We are just two weeks into the Trump administration and Washington does not know what hit it," said Sen. John Barrasso (R., Wyo.), the No. 2 Senate Republican, on "Fox News Sunday." Asked if he was concerned that the tariffs could undermine the administration's other policy goals, Barrasso said no.
Rep. Jason Smith (R., Mo.), who chairs the tax-writing House Ways and Means Committee, said the tariffs would bring in billions of dollars in new revenue to the U.S. government.
During his presidential campaign, Trump telegraphed that tariffs would be a key part of his governing strategy, saying repeatedly that "tariff" is his favorite word. Many investors believed that this was part of a negotiating ploy with other countries and that he would try to extract concessions before following through.
So far, Trump hasn't spent much time negotiating with any other country. His top trade adviser, Howard Lutnick, his nominee for Commerce Secretary, hasn't yet been confirmed by the Senate. The confirmation hearing for his pick for trade ambassador, Jamieson Greer, hasn't occurred yet.
Wall Street analysts and economists are virtually unanimous that tariffs of the sort Trump unveiled this weekend will, if sustained for more than a few months, hurt U.S. growth and boost inflation. After the White House on Friday announced the forthcoming tariffs, stock indexes reversed daily gains to close solidly lower, and long-term bond yields, a key measure of U.S. borrowing costs, edged higher.
"The market needs to structurally and significantly reprice the trade-war risk premium," said George Saravelos, head of foreign-exchange research at Deutsche Bank.
A national home-building group said the tariffs threaten to slow residential construction. American fuel producers said it could mean higher gas prices. The generic drug industry trade association said it could increase drug shortages. Zippy Duvall, president of the American Farm Bureau Federation advocacy group, said U.S. farmers and rural communities would "bear the brunt of retaliation."
"It was Donald Trump who campaigned on lowering costs, and now it is Donald Trump who will raise them," said Senate Minority Leader Chuck Schumer (D., N.Y.).
The precise impact will depend on how long the tariffs stay in place and if other countries retaliate. The Tax Policy Center, a think tank, estimates the average household's after-tax income will fall 1%, or $930, in 2026 because of the tariffs. Goldman Sachs economists estimate the tariffs on Canada and Mexico, if sustained, would raise consumer prices by up to 0.7%, and knock 0.4% off the level of economic output.
In theory, the direct cost to consumers of tariffs could be offset by further tax cuts. But tariffs will have other, less tangible costs such as forcing consumers to alter what they buy because of cost or availability. The Peterson Institute for International Economics estimates tariffs will leave the U.S. economy about 0.25% smaller next year and 0.1% in the long run.
Tax-cut talks could begin soon in Congress, though that process is likely to play out over months. Trump wants to extend his expiring tax cuts from 2017 and add new measures such as tax-free tips and tax-free overtime pay. Republicans generally agree on his broader goals. But they are hamstrung by their narrow House majority and mired in internal disputes over how deeply to cut federal spending alongside the tax cuts. They may take the first formal step forward this week, bringing a blueprint to the House budget panel.
Trump's push to cut government spending has already run into legal challenges and internal missteps. The White House believes high levels of government spending fuel inflation, and last week the Office of Management and Budget tried to put a temporary freeze on a range of government programs.
That initiative sparked confusion and was initially blocked by a federal judge. White House officials will have another opportunity to pursue spending cuts when they negotiate a budget bill with Congress before a March 14 shutdown deadline. However, they will likely need cooperation from Democrats if they want to pass any package in a way that could avoid a government shutdown.
Another key part of Trump's economic agenda is boosting energy production, which he believes will bring down prices on a range of products and even lower interest rates. So far, there doesn't appear to be much appetite by other oil-producing countries or energy companies for a dramatic expansion of drilling, however. It is unclear what Trump might try to do to force compliance with this goal.
In 2018, when he launched tariffs aggressively, he said his goal was to bring back American jobs. This time, he seems more focused on the hefty import duties that tariffs could bring in, creating more money for his agenda.
Whether the tariffs could also force changes that Trump has sought remains unclear. Summers, who had correctly warned then-President Joe Biden in 2021 that his stimulus policies would lead to higher inflation, said Sunday on CNN's "Inside Politics Sunday" that he didn't think the tariffs would succeed in forcing other countries into accepting meaningful changes in policy.
"Think about what giving in to a bully does. It invites more bullying," Summers said.
--Greg Ip, Richard Rubin, Ryan Dezember and Jared S. Hopkins contributed to this article.
Write to Lindsay Wise at lindsay.wise@wsj.com
(END) Dow Jones Newswires
February 02, 2025 21:00 ET (02:00 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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