icon
icon
icon
icon
Upgrade
Upgrade

News /

Articles /

Trump's Tariffs: A Recipe for Stagflation?

Theodore QuinnThursday, Jan 23, 2025 9:25 am ET
4min read


The specter of stagflation, a toxic combination of high inflation and stagnant economic growth, looms large as former President Donald Trump's tariff proposals resurface. With Trump's return to the White House, investors and economists alike are bracing for potential economic fallout. Let's delve into the potential impact of Trump's tariffs on the US economy and the global economy at large.



The Inflationary Impact

Trump's proposed 60% tariff on Chinese imports and a 10% universal tariff on all other imports would significantly increase the cost of goods for US consumers and businesses. This would lead to a substantial increase in consumer prices, with the Federal Reserve Bank of New York estimating a 1 percentage point (ppt) increase in consumer price inflation by the fourth quarter of 2025. This inflationary impulse would be felt across various sectors, with households in the bottom income quintile bearing a larger burden (1.6% of disposable income) compared to those in the top quintile (0.7%).



The Growth Impact

The increased cost of imports would lead to a significant economic slowdown, with real GDP growth reduced by 1.2 ppt in both 2025 and 2026, to 0.5% and 0.8% respectively. This retrenchment in consumer spending and business investment would result in a substantial loss of disposable income for US households, with an average loss of $1,145 per household in 2025.

Retaliatory Measures and Global Spillovers

If the US were to impose significant tariffs on China and other trading partners, retaliatory measures by these countries are likely to exacerbate stagflation risks for the US and global economies. China could retaliate by targeting US exports in sectors where the US has a strong dependency, depreciating its currency, or rerouting its trade. Other countries might also impose tariffs on US goods, reducing US exports and further impacting the US economy.



Lessons from the Past

History serves as a grim reminder of the consequences of protectionist policies. In 1930, the US economy entered a deep recession following the passage of the Smoot-Hawley tariff bill, which saw average US tariffs almost double. The bill was a disaster, leading to a 67% decline in global trade and a record 13% decline in the US economy the following year. The next year, in 1931, the US economy fell off a cliff, with unemployment in Germany soaring to 6 million. Ultimately, US business and consumers lost out from the trade war, and countries retreated into isolationism.

In conclusion, Trump's tariff proposals could have a stagflation-like impact on the US and global economies, with significant inflationary pressures and a substantial economic slowdown. Retaliatory measures by trading partners would likely exacerbate these risks, leading to a tit-for-tat escalation of trade tensions and a significant negative economic shock. As we've seen in the past, protectionist policies can have devastating consequences, and it's crucial for policymakers to learn from history and avoid repeating the mistakes of the past.
Disclaimer: The news articles available on this platform are generated in whole or in part by artificial intelligence and may not have been reviewed or fact checked by human editors. While we make reasonable efforts to ensure the quality and accuracy of the content, we make no representations or warranties, express or implied, as to the truthfulness, reliability, completeness, or timeliness of any information provided. It is your sole responsibility to independently verify any facts, statements, or claims prior to acting upon them. Ainvest Fintech Inc expressly disclaims all liability for any loss, damage, or harm arising from the use of or reliance on AI-generated content, including but not limited to direct, indirect, incidental, or consequential damages.