Donald Trump has brought back a wave of punishing tariffs that are remaking the blueprints of the entire American economy. These dramatic new policies were immediately felt through a reaction in trade and other economic indicators. These $300 bn. They add to a new 25% tariff on aluminum and steel, plus a high 145% duty on Chinese imports. These shifts are highly consequential. America at this moment is dealing with a trade deficit that soared to record spans around the turn of the year.
US trade deficit jumped further by 34% in January to $130.6 billion, record since 1994. In February, the trade deficit narrowed a bit to $122.7 billion. Still, this was the second largest trade deficit in history. These changes illustrate the complexity of Trump’s tariff agendas and how they directly shifted the trade landscape.
The Impact of Tariffs on Trade
Trump’s disastrous tariff war triggers a 25% tax on products imported from Mexico and Canada. This extends even to things that don’t pass muster under current free-trade agreements. Protectionist though he is, his policies do much more than deliver a 10% baseline tariff on all US imports. Further, that still more tariffs on auto parts will be coming down the pike shortly. These protective moves, taken to shield American industries, have lapsed into an erratic and highly unpredictable trade climate.
This has led economists to try and keep up with dramatic changes in where consumers spend their money, thanks to these tariffs. “If you look at what drove the widening in the trade deficit, it was mostly industrial supplies and consumer goods, durable items that aren’t perishable,” stated Nicole Cervi, an economist at Wells Fargo. This finding further highlights how tariffs are changing demand and supply trends in every sector.
For retail sales, they fell a lot in January, down 0.9%. This drop is indicative of consumers feeling uncertain and scared as they face the impact of higher prices due to tariffs. In March, retail sales increased at their fastest monthly rate in more than two years. Americans rushed out with a vengeance to purchase goods in dread of expected price increases.
Economic Growth and Projections
Our economy right now is up against some pretty serious macroeconomic headwinds as the US economy comes to terms with the damage these tariff policies have wrought. In terms of GDP growth, Q1 will be a particularly rough quarter. In real (inflation adjusted), seasonally adjusted terms, we expect it to come in at an annualized rate of only 0.8%. The Federal Reserve Bank of Atlanta has been predicting as much as a 6% drop in GDP growth. They’re looking for it to drop to 2.5%, which would be the worst quarter since mid-2020.
Consumer spending on both goods and services fell by 0.3% in January, deepening signs of an economic standstill. As macro analyst at finance giant William Blair Richard de Chazal noted, “There was a glimmer of softness. This observation only makes clear just how tenuous these economic circumstances truly are.”
Despite these challenges, business investment in March appeared resilient, indicating that companies remain cautiously optimistic amid uncertainty surrounding Trump’s policies. This resilience indicates that despite the usual tariffs’ predictable effect of driving up costs and changing consumer behavior, businesses are learning to adjust.
Future Outlook
This signals that the Biden administration is ready to move beyond and address the challenges caused by Trump’s harmful tariffs. Compounding this, it has to operate under the general economic climate. With long-term prosperity at stake, the trade deficit’s record-setting surge during Trump’s second term is serious cause for alarm.
Nathan Sheets, global chief economist at Citigroup, commented on the mixed signals from current economic data: “There’s a lot of noise in the data from storms, people front-loading and some payback for the strength in the fourth quarter.” It is these nuances that demonstrate the difficulties economists encounter in drawing definitive conclusions regarding performance in the future.