The Memo: Trump tariff threat muddies economic picture

President-elect Trump’s emphatic promise of new tariffs is sharpening the debate over how he will handle the economy. It’s likely the single most important domestic issue of his second term.

Trump is poised to enjoy almost perfect timing in taking the reins of an economy on the rise.

Inflation has tapered all the way down to 2.6 percent in the latest figures. Price rises had peaked at 9.1 percent in June 2022, 17 months after President Biden took office. The political wounds inflicted at that time contributed to Vice President Harris’s defeat by Trump in November’s election.

The unemployment rate is a modest 4.1 percent. And, in September, the Federal Reserve cut interest rates for the first time in four years. It did so again at the start of this month — with the expectation of more cuts to come.

Trump “is inheriting an exceptional economy,” said Mark Zandi, chief economist at Moody’s Analytics. “It is growing strongly, there are lots of jobs across lots of industries, and unemployment is low. The only blemish had been inflation, but that’s now down as well.”

But many economists, including Zandi, wonder if Trump’s enthusiasm for tariffs could trip him up.

Earlier this week, Trump announced plans to levy tariffs of 25 percent on all imports from Canada and Mexico, as well as adding 10 percent to existing tariffs on Chinese imports.

Writing on social media, the president-elect contended that the tariffs on Mexico and Canada were related to immigration — or as he put it, “ridiculous Open Borders.” 

“This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!” Trump contended.

He cast his proposed tariffs on China in somewhat similar light, framing them as a response to fentanyl coming into the United States.

A president has considerable leeway to make policy on tariffs, using a provision that allows such levies to be set by the commander in chief if they are a matter of national security.

But the response, from markets and from economic experts, to Trump’s proposal has been chilly.

Most economists, regardless of their ideological stance, see tariffs as likely to recharge inflationary pressures.

That’s true across a brand swath of industries.

The stock prices of the ‘Big Three’ automakers — General Motors, Ford and Stellantis — fell sharply on the news of Trump’s tariffs. Auto companies are often heavily dependent upon supply chains that traverse the nation’s northern and southern borders.

Significant amounts of Americans’ food, especially fruit and vegetables, are also imported from elsewhere in North America.

Any resurgence of inflation would be a galling outcome for Americans who elected Trump in part because they believed he would bring prices down.

The economy was considered the most important issue in this year’s presidential election by 39 percent of voters, according to the voter analysis conducted for The Associated Press and Fox News. The number of voters ranking the economy as issue No. 1 was far higher than those who chose any other topic.

Trump won those voters by 61 percent to 37 percent over Harris, the analysis found. 

Fifty percent of all voters said Trump would be better able to handle the economy, versus 40 percent who said the same of Harris.

A related danger for Trump is that any rise in inflation would likely stall the Fed’s general approach to easing interest rates.

In the week following the election, Federal Reserve Chair Jerome Powell said at an event in Dallas that “the economy is not sending any signals that we need to be in a hurry to lower rates.”

Any delay in cutting rates will also postpone relief for Americans who want home mortgages, auto loans and credit card debt to be less burdensome.

Trump is, as ever, unpredictable.

Some allies suggest the tariff plan may never actually come to fruition and that Trump is threatening the levies mainly to try to force a chance of policy from other nations.

Controversial hedge fund manager Bill Ackman, who endorsed Trump in July, wrote on social media that Trump was “going to use tariffs as a weapon to achieve economic and political outcomes which are in the best interest of America.”

Ackman added this was “a great way for Trump to effect foreign policy changes even before he takes office.”

On Wednesday, Trump wrote on social media that he had held a phone conversation with Mexican President Claudia Sheinbaum and that she had "agreed to stop Migration through Mexico, and into the United States, effectively closing our Southern Border."

However, Sheinbaum in her own social media post was much more equivocal, saying there had been an "excellent conversation" with Trump in which the two leaders had "discussed Mexico's strategy on the migration phenomenon." A follow-up post included a reiteration that Mexico's policy "is not to close borders."

Trump’s selection of Scott Bessent as his nominee to take over as Treasury secretary was broadly welcomed by markets. The president-elect notably stayed away from the kind of headline-grabbing, unorthodox choices he had made for some other departments.

Bessent, an investor who toward the start of his career had worked with liberal billionaire George Soros and who has contributed to Democratic presidential candidates in previous decades, is a far more traditional option.

But no sooner had he named Bessent than he made the tariff proposal, roiling the markets all over again.

The markers are still up overall since Trump’s election, with the broad-based S&P 500 having risen about 5 percent.

That is in part in expectation of some more business-friendly policies. During the campaign, Trump had proposed cutting the corporate tax rate. He and those closest to him also favor loosening regulations across the board.

Most experts believe that rising economic tide could lift Trump.

But some worry he — and his fondness for tariffs — could end up getting in his own way.

The Memo is a reported column by Niall Stanage.