Candidate Trump promised tariffs on all imports from 10 to 20 percent, with a special rate of 60 percent on all imports from China. While special favors and brinksmanship will determine the ultimate levies, it's worth taking a look at where the costs of the proposed duties will fall.
Machinery and electronics and electrical machinery are the commodities most impacted by the prospective tariffs, with transportation equipment and chemicals becoming more impacted as the duties are applied to trading partners beyond China, according to a study by the Peterson Institute of International Economics.
The United States purchased 13.6 percent of its 2023 merchandise imports from China and another 38.3 percent from free trade agreement (FTA) partners; the remaining 48 percent of American imports come from other sources and currently are taxed at MFN rates, the authors note.
Consumers can expect to see higher prices reflected in electrical devices, toys and sporting goods, vegetable and meat products, and imported foodstuffs. China is the dominant supplier to the United States of toys and sports equipment, provides 40 percent of US footwear imports, and is the source of about one-quarter of US electronics and textiles and apparel imports, according to the report.
Consumer electronics were largely shielded from the 2018 tariffs, including cell phones, laptops, and smartwatches. Toys and sports equipment are currently very lightly taxed, the authors note, and a 60 percent tariff almost certainly will be felt directly by American households.
The US has Free Trade Agreements with 18 countries, from Australia to Singapore, with the bulk of the volume defined by the USMCA and KORUS FTA (Korea-U.S. Free Trade Agreement) pacts. While modest in volume, an abrogation of the CAFTA-DR (Central America-Dominican Republic FTA) may have an outsized impact on migration pressures at the southern border.
FTA partners supply more than half of America’s fuel and transport equipment imports, about one-third of imported machinery, and one-fourth of imported electronics and electrical equipment.
The President-Elect recently threatened tariffs of 25 percent on Mexico and Canada. Currently, the average US tariff applied to imports of goods from USMCA partners is generally below 1 percent.
A sector particularly hard hit by duties on our FTA partners is transportation equipment, with 2023 US imports of $235.7 billion. Free trade agreement partner South Korea is particularly exposed; with their ongoing investment in US automotive and shipbuilding capacity.
USMCA partners are also important sources for the United States of vegetable products (47 percent of total imports), prepared foodstuffs (42 percent of total imports), and animal products (33 percent of total imports).
Purchases from Non FTA trading partners (including Europe, Japan and the U.K.) would see tariff rate increases between 8 and 10 percent on items such as chemicals, machinery, electronics and electrical machinery, transportation equipment, and miscellaneous manufactures the authors estimate.
Harder to quantify is the impact of retaliation by trading partners. China's export restrictions on critical minerals can be seen as an opening salvo, and despite the incoming administration's unvarnished disdain for the World Trade Organization, the forum may see an upsurge of case volume.
"The only certainty is that new tariffs will be costly for the United States," the Peterson authors conclude, "with a burden that falls more heavily on lower income households."
With the election over, attention has shifted from Joe Sixpack regardless, so what impact would the tariffs have on currencies and capital flows?
Proposed Treasury Secretary Scott Bessent has heartily toed the line on support for tariffs, writing for Fox last month "Critics of tariffs argue that they will increase the prices Americans pay for imported goods. This, reduced to absurdity, was the Harris campaign’s "sales tax" argument. But the facts argue against this."
An accomplished student of economic history, as well as a billionaire global macro investor, Bessent is nobody's fool. A closer reading of his essay belies a greater appreciation for the use of tariffs as a negotiating cudgel than a path out of the present fiscal jam.
Proposed Commerce Secretary Scott Lutnick has a less nuanced endorsement for tariffs, though he has been ring-fenced in Commerce, for now.
Tariff boosters note that during President Trump’s first term, the effective tariff rate on Chinese imports rose by 18 percentage points, yet inflation declined. A 14% depreciation of the renminbi (USDCNY) offset over three-quarters of the tariff impact. Importers also absorbed some costs through reduced profit margins, especially in retail goods.
The US Dollar hasn't been at such an elevated level to its peers since the 1985 Plaza Accords. A reversal in foreign exchange would compound the cost of imports, but a drop in the dollar's value would indicate something going very wrong.
Elevated domestic interest rates sustain the dollar's appreciation. Those same rates pinch real estate investors, homebuyers and buyers of capital goods. High rates also drive fiscal policy (through debt service) far more than Team DOGE can dream of.
Peter Navarro, Trump's incoming senior counselor for trade and manufacturing, told Reuters the White House would not interfere with the Treasury Department's biannual review looking in to whether foreign trade partners are manipulating their currencies.
He added, however: “I don't believe the Trump Treasury Department would welcome Chinese currency manipulation very fondly. The history of China as a currency manipulator is well-known.”
On Thursday, Reuters reported that China's top leaders and policymakers are considering allowing the yuan to weaken in 2025 as they brace for higher U.S. trade tariffs as Trump returns to the White House.
Navarro, who also served as an economic adviser during Trump's first term, said Trump could escalate tariffs even further if China weakens its currency, rather than waiting for the biannual Treasury report. “There's appropriate remedies there,” Navarro said. “If (Trump) didn't want to wait for any report, he could just raise tariffs higher.”
A convoluted, but increasingly popular line of reasoning among Team Trump advocates a depreciating Dollar, despite the inflationary impact. To address dollar overvaluation, Trump advisers call for a “Mar-a-Lago Accord” for coordinated depreciation. Foreign countries could sell U.S. bonds to weaken the dollar, raising interest rates.
They suggest pairing a currency pact with a "duration agreement", where foreign holders extend the maturity of their U.S. debt. Treasury could issue century bonds to replace shorter-term debt.
If (when) foreign governments resist, the U.S. could use the International Emergency Economic Powers Act of 1977 to reduce the appeal of reserve accumulation by "withholding a portion of interest payments on Treasury securities." These strategic defaults on Treasury debt, or “user fees,” could vary by country. according to advocates.
The rise in prices from a tax on imports need not translate into higher interest rates, according to David Mericle, Chief Economist at Goldman Sachs Research. “If we get the tariffs we have in our baseline, the impact on inflation is just not that big,” says Mericle.
A one-off jump in prices from a tariff differs from a pick-up in the underlying inflation trend, Mericle notes, and the Fed is able to respond differently. In 2019, when the first Trump administration imposed tariffs, the Fed prioritized the risk to growth from a tightening in financial conditions over the impact of a moderate one-time price level increase. “It's not clear to me that the risks are as one-sided as people think,” he says.
Oh, for a good one-armed economist.
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