Assessing the impact of Trump’s tariffs
McKibbin and Noland analyze the potential economic impact of tariffs threatened by President-elect Donald Trump on Canada, Mexico, and China. Their findings indicate the following economic impact of proposed tariffs:
25% tariff on Canada and Mexico:
– US GDP would be approximately $200 billion lower over Trump’s second term.
– Canada would lose around $100 billion from its economy.
– Mexico’s economy would be reduced by up to 2% relative to baseline forecasts.
– All three countries would experience slower growth and accelerated inflation.
Additional 10% tariff on China:
– If China retaliates with a similar tariff: US GDP would be $55 billion less over four year and China’s GDP would be $128 billion less.
– Inflation would increase by 20 basis points in the US and 30 basis points in China after an initial dip.
Combined effect of all tariffs:
– The US would suffer more significant damage than in individual scenarios.
– Possibilities for trade substitution between Mexico and China would be reduced.
– Higher inflation and larger GDP losses would occur for the US.
Additional considerations:
– The model likely underestimates the real damage due to the highly integrated nature of these economies, especially in sectors like motor vehicles.
– Mexico is particularly vulnerable, with about 16% of its national value-added exported to the US.
– Historical precedent suggests Trump may not follow through on these threats, as seen during his first term.
– Renegotiating the US-Mexico-Canada Agreement (USMCA) is presented as a preferable alternative to imposing tariffs.
Trump’s threatened tariffs projected to damage economies of US, Canada, Mexico, and China
By: Warwick J. McKibbin, Marcus Noland – PIIE, Australian National University
