Treasury Secretary: Trump's Tariffs Unlikely to Boost Inflation

Treasury Secretary Scott Bessent has dismissed concerns that President Donald Trump's proposed tariffs on imports from China, Canada, and Mexico will lead to an increase in inflation. In interviews with CBS and Fox News, Bessent argued that China will absorb the cost of tariffs, and currency adjustments will help offset any price increases. He also pointed to a holistic approach that includes deregulation and cheaper energy, which he believes will keep inflation in check.



Bessent's assessment is supported by historical data and economic theory. Tariffs have had a limited impact on inflation in the United States, with a study by the Peterson Institute for International Economics finding that the tariffs imposed by the Trump administration in 2018 increased prices for U.S. consumers by an average of 0.17% over two years. This is a relatively small impact compared to the overall inflation rate during that period.

Economic theory also supports the idea that tariffs have a limited impact on inflation. The theory of comparative advantage suggests that countries should specialize in producing goods and services in which they have a comparative advantage. When countries impose tariffs, they disrupt this specialization and can lead to higher prices for consumers. However, the overall impact on inflation is limited because the increase in prices for imported goods is offset by lower prices for domestically produced goods.

Bessent's perspective is also influenced by the experience of the first Trump administration. In response to U.S. tariffs, China did not pass on the full cost of the tariffs to U.S. consumers. Instead, it absorbed some of the cost and reduced its profit margins. This is consistent with the idea that exporters have an incentive to absorb some of the cost of tariffs in order to maintain market share.

However, the market's reaction to Trump's tariff policies suggests that investors are not confident in Bessent's assessment. The Dow Jones Industrial Average fell more than 300 points on Friday after the report's release, following a 400-point drop on Thursday. This suggests that investors are concerned about the potential impact of tariffs on the economy and corporate earnings.



In conclusion, Treasury Secretary Scott Bessent's assessment that President Donald Trump's tariffs are unlikely to raise inflation is supported by historical data and economic theory. However, the market's reaction to Trump's tariff policies suggests that investors are not confident in Bessent's assessment. The negative market reaction to tariff announcements suggests that investors are concerned about the potential impact of tariffs on the economy and corporate earnings, and they do not believe that tariffs will have minimal consumer impacts or keep inflation in check.