Trump’s Trade War Is Worse than You Think

Taxing our largest trading partners will pass costs to consumers en route to deeper economic damage

Though changes are occurring in real time, a trade war is brewing. On Saturday the Trump administration announced that Tuesday at 12:01am, it would begin imposing 25% tariffs on all imports from Canada and Mexico, and 10% on China (with a carveout for Canadian energy, which will face a 10% tariff). This morning, Trump and Mexican President Claudia Sheinbaum announced a one-month pause to tariffs on Mexico, but the others are still set to take effect as planned.

Many analysts, including myself, have pointed out the costs of these tariffs to consumers: they will raise prices on gas, groceries, and much else, and the administration must be held accountable.

But these new sales taxes also pose broader threats to the strong economy Trump has inherited. The 2025 economy differs from the 2017 economy in crucial and underappreciated ways, and this time around the administration is playing a more dangerous game than many realize.

Here's why these sweeping tariffs are misguided:

—The average household’s spending is likely to rise by around $1,500. Canada, Mexico, and China are our three biggest trading partners, and since domestic consumers bear most of the cost that these new sales taxes impose on imports, Americans will pay more for cars, food, medicines, furniture, gas, and a lot more. These costs disproportionately hit the lowest-income consumers. Such price impacts are not just a function of the taxes we impose; they are exacerbated by the retaliation from tariffed countries that are highly likely to be forthcoming.

—The three North American economies have highly integrated supply chains. Goods under production cross our northern and southern border multiple times, which will amplify the disruption caused by the tariffs. The Times recently cited an automotive trade group pointing out that “50 percent of the content of a vehicle built in Canada came from the United States. For Mexico, the proportion was 35 percent.” Trade with Canada and Mexico works much like trade between states: think about the economic frictions that would arise from instating tariffs between North and South Carolina.

—You can’t unscramble the globalization omelet. I’m sure that in Trump’s mind, every dollar we spend on every import flows right back to the foreign exporter. But according to research by the San Francisco Federal Reserve, that ignores significant “local content.” About 45% of our imports are inputs into domestic products, and even in cases where final goods are fully made elsewhere, there’s the cost of storing, moving, and selling them here. The Fed researchers find that “nearly half the amount spent on goods and services made abroad stays in the United States, paying for the local component of the retail price of these goods.”

—Then there’s the policy lurching, and not just with tariffs. In its first two weeks the new administration has consciously “flooded the zone” with policy changes large and small, legal and illegal, at least one of which was stayed by the courts hours after it was proposed. This creates a tough planning environment for businesses. Mary Barra, the CEO of GM, recently told the Wall St. Journal that “the automaker won’t do anything that requires significant capital…until it has more clarity on any policy changes.” Note that this fallout occurs even if the administration is bluffing and pulls the plug before the tariffs go into effect on Tuesday. Policy uncertainty is a big negative for business investment.

Trump once again inherited a strong economy from his Democratic predecessor. Last week we learned that real GDP grew at an above trend 2.5% last year, inflation is easing, and real wages are up. Due in part to the incentives legislated during the Biden Administration (e.g., through the CHIPS and Inflation Reduction Acts), investment spending has been a solid contributor to recent growth.

But there are also risks in the current economy that weren’t there in 2017, the last time President Trump started his term. Back then, the interest rate on a 10-year Treasury bond was 2.5%; this morning, that rate was 4.5%. In December 2016, the core inflation rate the Fed watches most closely was 1.8%; in December 2024, it was 2.8%.

Both of these variables pose risks that didn’t exist eight years ago. Investors in longer-term U.S. debt are already demanding a “term premium:” a higher return for locking up their money for extended periods. That’s a negative for both investment and for financing our growing public debt.

It’s a particularly terrible time to mess around with inflationary policies. We made real progress against price pressure in the past few years: grocery inflation fell from over 13% to under 2%. The progress has more recently stalled a bit. The Fed believes, as I’ve written, that the stall is likely easing, but that’s not guaranteed.

The bottom line is that it will be critical in coming months to track the full impact of this new trade war. The most visible, early effects will be to consumer prices, especially groceries, gas, and retail goods. But the damage to the economy may cut much deeper, including snarling of supply chains, business uncertainty and its potential negative investment impacts, interest rates, and equity markets.

As of this morning’s open, the Dow is down 600 points. In other words, the task of tracking Trump’s new trade war has begun.

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Jared Bernstein is the Former Chair of President Biden’s Council of Economic Advisers.