The White House confirmed on Friday that President Donald Trump will impose 25% tariffs on imports from Mexico and Canada on Saturday, along with a 10% import tax on Chinese goods, and that's just the start. An early S&P 500 rally on good inflation news reversed lower Friday afternoon amid worries that the tariffs will boost inflation and slam GDP growth.
Ford Motor and General Motors, among the likely losers from tariffs on Mexico and Canada, saw solid gains turn to slight losses on the session.
Still, the broader economic impact is hard to predict for several reasons. It's not yet clear how U.S. trade partners will retaliate. Only a portion of the tariffs might be passed onto consumers. A third big wild card is the rest of President Trump's agenda, especially tax cuts. Trump has talked about tariffs as a revenue raiser to pay for tax cuts.
Trump had threatened these exact tariffs in late November, citing inflows of migrants and fentanyl. Despite numerous reports that Trump tariffs would start small and potentially ratchet up, he stuck to his guns.
Tariff Retaliation Details To Come
Reports indicated that Canadian oil would face a more moderate 10% tariff rate, limiting upward pressure on oil prices.
President Trump acknowledged there could be "short-term disruption." But he told reporters that "tariffs don't cause inflation, they cause success." He likely means that higher prices on imports will lead to more domestic production.
The impact of the tariffs will depend partly on any retaliation by U.S. trading partners. Satyam Panday, chief U.S. and Canada economist at S&P Global Ratings, has predicted that Canada will "respond in kind" with its own 25% tariff.
However, Mexico is unlikely to place tariffs on U.S. manufactured imports, "given that most are intermediate goods eventually exported to the U.S.," according to Elijah Oliveros-Rosen, chief emerging markets economist at S&P Global Ratings. Retaliation could focus on agricultural and food imports, he said.
The ratings firm says the auto sector and electrical equipment are most exposed to tariff shocks in Mexico, while processed commodities have the largest exposure in Canada.
Trump Tariffs Impact On GDP, Inflation
Brad Setser, senior fellow at the Council on Foreign Relations, posted that the Trump tariffs taking effect on Saturday are roughly double the scale of tariffs phased in during 2018 and 2019, implying more of an economic shock. "This is a major tax hike." He added that a 10% tariff on Chinese imports could hit $40 billion to $50 billion worth of iPhone imports by Apple.
After rising about 4% early Friday on earnings, Apple turned lower midday, slipping 0.7%.
Deutsche Bank economists led by Matthew Luzzetti have estimated that tariffs of 25% on Mexico and Canada, plus 10% tariffs on China, could raise the Fed's primary inflation rate by just over one percentage point this year. Their forecast, assuming tariffs, has the core PCE inflation rate rising to 3.7%, instead of the baseline 2.6% estimate.
Bernard Yaros, lead U.S. economist at Oxford Economics, wrote this week that he's expecting U.S. GDP growth of 2.6% this year, but that threatened Trump tariffs would cut that nearly in half.
The Bank of Canada has said that the Canadian economy could tank by 6% this year in the face of 25% tariffs.
Round 2 Coming: 'A Lot Of Tariffs On Steel'
Trump told reporters that the next round of tariffs could go into effect on Feb. 18. "We're going to put a lot of tariffs on steel," he said
He also mentioned semiconductors, prescription drugs, aluminum, copper and oil and gas imports.
S&P 500 Reaction
Confirmation of the Trump tariffs turned a solid midday gain into a 0.5% loss the close. The S&P 500 had climbed about 0.5% on a lower-than-expected core inflation reading, nearly hitting record highs.
The S&P 500 had finished just 0.8% off its Jan. 23 record closing high on Thursday.
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