Trump’s tariffs on Canada, Mexico, China may cause higher inflation, fiscal disruption

New trade penalties against Canada, Mexico and China that President Donald Trump plans to impose represent an aggressive early move against America's three largest trading partners, but at the risk of higher inflation and possible disruptions to the global economy.

Advertisement

In Trump's view, the 25 per cent tariffs against the two North American allies and a 10 per cent tax on imports from Washington's chief economic rival are a way for the United States to throw around its financial heft to reshape the world.

“You see the power of the tariff,” Trump told reporters on Friday. “Nobody can compete with us because we have by far the biggest piggy bank.” The Republican president is making a major political bet that his actions will not worsen inflation, cause financial aftershocks that could destabilise the worldwide economy or provoke a voter backlash. AP VoteCast, an extensive survey of the electorate in last year's election, found that the US was split on support for tariffs.

It is possible that the tariffs could be short-lived if Canada and Mexico can reach a deal with Trump to more aggressively address illegal immigration and fentanyl smuggling. Trump's move against China is also tied to fentanyl and comes on top of existing import taxes.

The president is preparing more import taxes in a sign that tariffs will be an ongoing part of his second term. On Friday, he mentioned imported computer chips, steel, oil and natural gas, as well as against copper, pharmaceutical drugs and imports from the European Union — moves that could essentially pit the US against much of the global economy.

The S&P 500 stock index slumping after his announcement Friday. It is unclear how the tariffs could affect the business investments that Trump said would happen because of his plans to cut corporate tax rates and remove regulations. Tariffs tend to raise prices for businesses.