The economic fallout of President Donald Trump’s plans to impose import tariffs on Canada, Mexico, and China will depend largely on how long those higher tariffs stay in effect, according to Wharton emeritus finance professor Jeremy Siegel. Trump also plans 25% import tariffs on steel and aluminum, and reciprocal tariffs across all trading partners.
“It’s not good economically and it’s not good politically,” Siegel said of the proposed actions during a recent Wharton Business Daily podcast episode. (Listen to the podcast.) “There may be brinksmanship here. By tomorrow, they may be gone.” Siegel’s prediction became fact in short order — two days following conciliatory moves, Trump placed the tariff increases on Canada and Mexico on hold for 30 days.
The White House on February 1 had said the tariffs were in response to an “extraordinary threat posed by illegal aliens and drugs.” It had announced a 25% additional tariff on imports from Canada and Mexico, and a 10% additional tariff on imports from China; it spared imports of energy resources from Canada with a lower 10% tariff. Trump warned the European Union will be next, though he took “a softer line” on the U.K., the Guardian reported.
The tariff plans have been a moving target, with retaliations, peace overtures, pauses, and withdrawals. Canada, for instance, had initially retaliated with a 25% tariff on more than $100 billion of U.S. products. Canada’s Ontario province said it would scrap an internet contract with Elon Musk’s Starlink, and two Canadian provinces refused to carry U.S. liquor brands. China said it is open to a new trade agreement to buy $200 billion worth of U.S. goods and services over two years, among other concessions.
“This is not going to change anyone’s fundamental financial lifestyle, but it’s the visible stuff that social media loves, and it’s going to just feed into it day after day after day.”— Jeremy Siegel
Meanwhile, India has taken proactive steps to avoid getting caught in the next round of Trump’s tariff actions, including making it easier for Harley-Davidson motorcycles to be sold in the country. Trump’s tariff strategy seemed to work in the case of Colombia, which relented after initially refusing to accept deported migrants from the U.S.
Duration Is Key
Duration is key to how the new tariffs affect the economy, interest rates, and the stock markets. “A lot of the effect obviously depends on how long they’re going to be on,” Siegel said. “It’s certainly not going to tank the U.S. economy. It’s not going to put us in a recession.” He estimated the immediate impact over two to three months to be “a few tenths of a percentage point off of GDP and a few tenths up on the consumer price index.”
Siegel also predicted the stock market’s reaction would “totally depend on how long” the tariffs are enforced. “As long as these tariffs are in effect and are not lowered, it’s very hard to see the stock market going up.”
Siegel said “it seems to make political sense” if the higher tariffs are a short-term measure. “Otherwise, [Trump] will get the feedback both from legislators and the public, who are not going to like all these stories about increases in some of their favorite foods. It’s just the type of stuff which the news media loves to eat up.”
High Visibility for Gas and Guacamole
Visibility is high for avocados and guacamole, which could get costlier with the tariffs. “Everyone’s talking about avocados and the Super Bowl and guac,” Siegel said. “Eighty percent of our avocados come from Mexico, so obviously the price of the remaining ones would go up.”
“This is not going to change anyone’s fundamental financial lifestyle, but it’s the visible stuff that social media loves, and it’s going to just feed into it day after day after day,” Siegel said. “And not at all to the benefit of President Trump.”
“As long as these tariffs are in effect and are not lowered, it’s very hard to see the stock market going up.”— Jeremy Siegel
“Gasoline is the most visible price,” and its cost is already set to rise, Siegel said. The futures markets have already risen in response to the tariffs on Canadian crude, he pointed out. “There are many gas stations that price immediately off futures, even before they [pay the higher prices]. So, we see [an increase of] two, three, or four pennies on gasoline [per gallon].”
Rumblings Ahead in Congress
According to Siegel, Trump’s biggest speed-bump on tariffs will come from Congress, where the President will want every vote for his omnibus bill to give effect to his policies. “The Republicans have a very narrow margin in the House … they cannot afford to lose anybody,” Siegel suggested. Many Congress members elected from districts negatively affected by the tariffs could face a backlash, and that could cost five or six votes, he explained. “That’s where the rubber hits the road.”
Will the Tariffs Push Interest Rates?
If there is retaliation, and Trump responds with higher tariffs, there would be an uptick in the rate of inflation, Siegel said. He pointed to “a big debate” among economists and the Federal Reserve on the ideal monetary policy response to higher inflation caused by tariffs, and not by excess demand.
The Fed may want to treat the tariffs as “an external, supply-side issue” and wait for it to pass through; it may choose not to “make things worse by tightening credit,” he noted. Even if the Fed attempted a one-shot increase in rates, “that would certainly bring the ire of Trump on them,” he added. The next Fed meeting is set for March 19. “We’ll see how this all settles out by then.”
Some central banks are clearly more worried than others. On February 6, the Bank of England cut its key interest rate by a quarter percentage point (to 4.5%) and lowered its forecasts for U.K. economic growth, the Wall Street Journal reported. “The BOE warned that growth could be even slower if U.S. tariffs on imports rise, or even if there are high levels of uncertainty about U.S. trade policy,” the report added.
