Stagflation in the Forecast: The Tarriffs are Here

Trump's APRIL 2, 2025 Tariff Announcement

(Adjusted for Trade-Weighted Tariffs)

Liberation Day Reality

Until President Trump's "Liberation Day" announcement today, most Wall Street analysts and business leaders had maintained skepticism about the full implementation of his sweeping tariff threats. Many believed his aggressive trade rhetoric represented more of a negotiating tactic than an imminent policy reality. Market reactions over the past weeks reflected this sentiment, with investors largely pricing in a more modest tariff program or expecting last-minute compromises that would soften the economic impact.

This perception was shattered today with the implementation of one of the most comprehensive tariff regimes in modern American history. The scope and scale of the tariffs announced exceed most analysts' expectations, especially regarding the targeted higher rates for specific countries and the broad application across product categories. The stock market's sharp negative reaction after hours — with major indexes dropping 2-3% — underscores the business community's surprise at both the breadth and immediacy of the measures.

What many dismissed as campaign rhetoric or negotiating leverage has now become economic reality, forcing a rapid reassessment of growth forecasts, inflation expectations, and corporate earnings projections across industries.

Tariff Rates by Country

President Trump has announced a complex set of tariffs varying significantly by country. Here's a breakdown of the new tariff structure:

Baseline Tariff

President Trump has announced a "baseline" 10% tariff on all imports coming into the United States, characterizing April 2, 2025 as "our declaration of America's economic independence." BBC

Targeted Higher Rates

Beyond the baseline, Trump imposed significantly higher rates on specific countries:

• China: 34% additional tariff (on top of existing 20% tariffs, bringing total to 54%)

• European Union: 20% tariff

• Vietnam: 46% tariff

• Taiwan: 32% tariff CNBC

Several other countries will face even higher tariffs, with nations including Cambodia, Malaysia, and Bangladesh facing rates up to 50% in some cases. BBC

Automotive Sector

In addition to these general tariffs, Trump announced that from midnight on April 3, the US would start imposing 25% tariffs on all foreign-made cars. It remains unclear if this is additional to the universal tariffs. BBC

Special Provisions

The reciprocal tariffs do not apply to certain goods, including copper, pharmaceuticals, semiconductors, lumber, gold, energy and "certain minerals that are not available in the United States," according to a White House fact sheet. Reuters

USMCA Exemptions

A significant development in Trump's tariff policy is the treatment of goods from Canada and Mexico that comply with the United States-Mexico-Canada Agreement (USMCA). While the April 2, 2025 announcement maintained tough tariff stances, it's important to note the following USMCA-related exemptions:

USMCA-Compliant Goods Exempt

Goods that claim and qualify for USMCA preference are exempt from the tariffs. According to a White House fact sheet, there are "No tariffs on those goods from Canada and Mexico that claim and qualify for USMCA preference."

Percentage of Trade Covered

Approximately 50% of goods coming into the United States from Mexico and around 38% of goods from Canada comply with USMCA rules and are therefore exempt from the tariffs. This means roughly half of Mexican imports and more than a third of Canadian imports avoid the new tariffs.

Key USMCA-Compliant Categories

Items that currently come into the US under USMCA rules include televisions, air conditioners, avocados and beef. Almost all agricultural products traded between the US and Canada also fall under the USMCA.

Special Treatment for Certain Products

• For Canada, Trump's reprieve also applies to potash (a key fertilizer ingredient), though with a reduced 10% tariff rather than the full 25% for non-USMCA goods.

• A lower 10% tariff applies to energy products imported from Canada that fall outside the USMCA preference, rather than the full 25% tariff.

• The automotive sector received special attention, with temporary exemptions to "minimize disruption to the automotive industry" due to the integrated nature of North American automotive manufacturing.

Timeline for Exemptions

These exemptions are temporary and set to expire on April 2, 2025, when Trump has indicated he plans to implement a global regime of "reciprocal tariffs" on all U.S. trading partners. On that date, each country will face the same tariff rates that it subjects US goods to.

Primary Imports Affected by Country

China

The 20% tariff on Chinese imports (now increased to 54% total) will apply to several key Chinese electronics categories previously untouched by tariffs, including smartphones, laptops, video game consoles, smart watches, speakers and Bluetooth devices. Reuters

China is also a major supplier of auto parts to the U.S., with $18 billion worth imported last year. Industry analysts believe importers are likely to pass most or all of these cost increases to consumers. Associated Press

Mexico

In 2024, the U.S. bought more than $49 billion in agricultural products from Mexico, including 47% of imported vegetables and 40% of fruits. The 25% tariff could push prices up significantly for non-USMCA compliant goods. Associated Press

Mexico is the top supplier of cars to the U.S., and the automotive sector will be particularly hard hit due to the integrated nature of North American automotive manufacturing, which relies on components crossing borders multiple times during production. Associated Press

Canada

Canada is by far America's biggest foreign supplier of crude oil. Canadian energy imports (including oil, natural gas, and electricity) will be taxed at a lower 10% rate—a concession to households in the U.S. Associated Press

The American Fuel & Petrochemical Manufacturers trade group warned that higher costs to import crude oil from Canada and Mexico, as well as other Canadian energy products, could mean American consumers will pay more for energy. NPR

European Union

The EU will face a 20% tariff on its exports to the U.S. The EU has already announced retaliatory tariffs targeting U.S. goods worth €26 billion (£22bn) to be implemented in stages starting April 1 and fully in place by April 13. These will cover items ranging "from boats to bourbon to motorbikes," as well as steel and aluminum products. BBC

The UK was the top sales market for British-based Jaguar Land Rover last year, exceeding sales in the UK and China. European automakers are particularly vulnerable to the new auto tariffs. BBC

Vietnam

Vietnam will face a steep 46% tariff rate, among the highest imposed on any country. In recent years, Vietnam has emerged as an alternative manufacturing hub as companies sought to diversify away from China. BBC

Economic Impact Estimates

GDP Impact

Most economic forecasts predict GDP reduction of 0.4-1.6%, though these estimates were largely based on earlier tariff proposals that generally assumed lower rates than what was ultimately announced. The actual impact could be more severe given the higher-than-expected tariffs on multiple countries.

The Tax Foundation estimates the imposed tariffs would reduce US economic output by 0.4 percent before accounting for any foreign retaliation. Tax Foundation S&P Global Ratings projects US real GDP over the next 12 months could be 0.6% lower than previously forecast. Spglobal Goldman Sachs has dramatically cut its growth forecast to just 0.2% annualized in Q1 and 1% for full-year 2025, down 0.5 percentage points from prior estimates. CNBC

Inflation Impact

The tariffs are expected to increase inflation by 0.5-3.5 percentage points, with most estimates clustering around a 2.5-3.0% inflation rate for 2025, up from previous forecasts.

Goldman Sachs raised its core inflation forecast to 3.5% for 2025. CNBC S&P Global Ratings expects consumer prices to rise 0.5-0.7% with inflation approaching 3% by Q4 2025. Spglobal The OECD predicts US inflation will rise to 2.8% in 2025, up from 2.5% last year. CNN

Food Inflation Impact

The tariffs are expected to have a particularly pronounced impact on food prices, with grocery stores likely to pass on most of the increased costs to consumers due to their thin operating margins.

The U.S. imported more than $45 billion in agricultural products from Mexico in 2023, including fresh strawberries, raspberries, tomatoes, and beef. Grocery retailers operate on very narrow margins and will struggle to absorb tariff costs, especially for products like avocados where 90% come from Mexico. CBS News

According to an analysis from Democrats on Congress' Joint Economic Committee, fresh produce prices could increase by about 3%, while food prices overall may increase by 2%. CBS News

A strategic consultant to the food and agriculture industries has estimated that if 25% tariffs are implemented on produce imported from Canada and Mexico, produce prices at grocery stores are likely to increase between 15% and 25%. AgFunderNews

The impact will be particularly pronounced during winter months when the U.S. relies more heavily on Mexican produce imports. Tariffs will raise prices for imported tomatoes, raspberries, bell peppers, and strawberries, with Mexico being the leading supplier of each. NPR

According to USDA data, Mexico and Canada accounted for nearly $83 billion of the $196 billion in agricultural goods the U.S. imported between January and November 2024, representing 44% of total agricultural imports. CNN

The National Grocers Association has warned that tariffs effectively act as a "food tax" on consumers for imported products, with the U.S. becoming increasingly reliant on its neighbors for feeding its population. Reuters

Household Tax Burden and Consumer Impact

Per-Capita Tax Burden

According to the Peterson Institute for International Economics, the direct cost of the tariffs on Canada, Mexico, and China to the typical (median) U.S. household would be a tax increase of more than $1,200 a year. PIIE

The Tax Foundation estimates that the tariffs now imposed on the three countries would amount to an average tax increase of $1,072 per U.S. household, with tariffs on Chinese goods alone adding $329 in costs per household annually. NPR

The Center for American Progress has estimated that a 10% tariff on all imports would result in a tax increase of approximately $1,500 for the typical middle-income U.S. household (those in the 40th to 60th percentile of income distribution). Americanprogressaction

For more aggressive tariff proposals, such as a 20% worldwide tariff, the Peterson Institute estimates the median household would see its after-tax income fall by about 4.1%, more than $2,600 annually. PIIE

Total Tax Revenue

White House aide Peter Navarro has stated that the administration expects the tariffs to bring in approximately $6 trillion in revenue over the next decade, though this figure is seen as potentially inflated by most economic analysts. CNN

The Tax Foundation estimates that a 10% universal tariff would raise $2 trillion and a 20% universal tariff would raise $3.3 trillion from 2025 through 2034, before factoring in economic contraction effects. Tax Foundation

The Tax Foundation further estimates that the tariffs would increase federal tax revenues by $3.8 trillion ($3.1 trillion on a dynamic basis before retaliation) from 2025 through 2034. Tax Foundation

Consumer Price Impacts

Nationwide Mutual chief economist Kathy Bostjancic estimates the tariffs could lead to a nearly $1,000 per household increase annually in the cost of goods, though the strengthening dollar would help mitigate some of the inflation impact. Reuters

A 2024 study by the US International Trade Commission predicted that a 25% tariff on car imports would reduce imports by almost 75%, while increasing average prices in the US by about 5%. BBC

Analysts at the Anderson Economic Group have estimated that tariffs on auto parts just from Canada and Mexico could lead to costs rising by $4,000-$10,000 depending on the vehicle. Associated Press

Pass-Through Rate to Consumers

The Tax Policy Center modeled the distribution of tariffs in the same way it models excise taxes, assuming that tariffs on imported consumer goods are passed directly to U.S. customers, consistent with substantial evidence from prior import taxes. Tax Policy Center

Despite Trump's claims that his tariffs will be paid by other countries, economists widely agree that Americans will ultimately bear most of the cost through higher prices, as businesses typically pass these costs on to consumers. NPR

Historical Context

The April 2, 2025 tariff announcement represents the most significant tariff increase since the early 20th century. As shown in the tariff history graph, average tariff rates will rise to approximately 18.8% on all imports, the highest level since the mid-1930s. While the tariff itself isn’t as high as the19.8% peak reached during the Great Depression following the Smoot-Hawley Tariff, it is the biggest percent increase in trade weighted tariffs on record.

According to the Peterson Institute for International Economics, "The United States has not seen an average tariff on total imports of around 10 percent since 1943 and has not seen an average tariff on dutiable imports of about 17 percent since 1947." PIIE

Conclusion

The April 2, 2025 tariff announcement marks a historic shift in U.S. trade policy, with significant economic implications. Most analyses suggest the tariffs will reduce economic growth, increase inflation, and potentially lead to job losses. Median U.S. households can expect to pay between $1,200 and $2,600 annually in additional costs, as businesses are likely to pass through most of the tariff increases to consumers in the form of higher prices.

The USMCA exemptions provide some relief by sparing approximately 50% of Mexican imports and 38% of Canadian imports from the new tariffs. Key categories of exempt goods include televisions, air conditioners, avocados, beef, and most agricultural products traded between the U.S. and Canada. Special provisions also reduce tariffs on Canadian energy products to 10% rather than 25% and provide similar treatment for potash, a crucial fertilizer component.

Even with the USMCA exemptions, food prices will likely see significant increases, with fresh produce potentially rising by 3-15% in the coming months, especially for winter vegetables and fruits heavily imported from Mexico.

The ultimate economic outcome will depend on several factors: how long the tariffs remain in place, whether the USMCA exemptions are extended beyond their current expiration date, the extent of retaliatory measures from trading partners, the Federal Reserve's monetary policy response, and whether businesses can find alternative suppliers or absorb some of the increased costs.

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