Trump's New Tariffs Spark Inflation Fears, Economic Uncertainty

President Trump is set to embark on one of the most risky economic policies of his second term, implementing broad import tariffs aimed at driving the U.S. economy into a new phase of development. However, this policy comes with potentially high costs.

As Trump prepares to announce his "Liberation Day" plan, consumer confidence in the U.S. has plummeted to multi-year lows. Consumers are worried that these tariffs could trigger a new wave of inflation, while investors fear that higher prices for goods could squeeze corporate profits, adding further pressure to an already struggling stock market.

Trump has promised to create a new economic system that is no longer dependent on fiscal deficit spending, aiming to prevent Canada, Mexico, China, and Europe from continuing to exploit American consumers' demand for cheap goods. However, the specifics of how this goal will be achieved remain unclear, as does the economic cost it may entail.

Joseph LaVorgna, a former senior economic advisor to the White House and current chief economist at SMBC Nikko Securities, understands the market's anxiety but has confidence in Trump's negotiating skills. He notes, "This is a negotiation process that needs to be viewed from a long-term perspective. At this point, it's difficult to determine what the final implementation plan will look like."

What is certain is that the White House plans to impose "reciprocal" tariffs on its major trading partners, meaning that import taxes will be levied on foreign goods equivalent to the tariffs American products face in those countries. The latest reports suggest a possible 20% across-the-board tariff, but LaVorgna predicts the final tariff rate could be around 10%, with tariffs on China potentially reaching 60%.

Trump hopes to reduce the record $1.314 trillion U.S. trade deficit through these tariffs and pressure more goods to be produced domestically, creating jobs and achieving a fairer trade environment. However, this strategy could lead to significant short-term economic shocks.

In theory, tariffs are essentially import taxes and typically have an inflationary effect. However, during Trump's first term, despite high tariffs on countries like China, overall U.S. inflation rates did not rise significantly, with only localized price increases observed. Therefore, economists at the Federal Reserve generally view the impact of tariffs as one-time and short-lived, unlikely to become a sustained driver of inflation.

This time, however, the situation may be different. Trump's planned tariffs are on a scale far greater than any previous protectionist policy, potentially reaching the levels of the 1930 Smoot-Hawley Tariff Act, which sparked a global trade war and is widely considered a significant factor in the Great Depression.

Mohamed El-Erian, chief economic advisor at Allianz, points out that this policy could have two starkly different outcomes: "This could be a major reshaping of the U.S. and global economy, similar to the economic reforms of the Thatcher and Reagan eras, leading to a more vibrant private sector and simplified government regulations. However, if the tariff war escalates into a 'tit-for-tat' trade conflict, the U.S. could fall into stagflation, which, if entrenched, would become a long-term economic problem."

Currently, the U.S. economy shows signs of stagflation, though not to the extent of the 1970s to early 1980s. Economic growth is slowing, while inflation remains stubbornly high.

Goldman Sachs has downgraded its 2025 U.S. economic growth forecast, predicting GDP growth of only 1% this year, down from the Federal Reserve's previous estimate of 1.7%. Additionally, Goldman Sachs has increased the probability of a recession this year to 35%, although its baseline forecast remains positive economic growth.

Some economists are even more pessimistic about the economic outlook. Luke Tilley, chief economist at Wilmington Trust, predicts a 40% chance of a U.S. recession this year, not just due to tariff impacts. He believes that U.S. consumers are already in a weak state as they enter 2025, and tariffs could further weaken economic growth.

Declining business confidence is already affecting corporate decisions. A survey released by the Institute for Supply Management on Tuesday showed that business leaders are generally concerned about the uncertainty surrounding the tariff plan, with many companies delaying new orders and investment plans. A manager in the transportation equipment industry stated, "Due to the uncertainty of how tariffs will be implemented, our clients have already started to pause new orders."

Tilley also warns that tariffs could slow job market growth as businesses may delay hiring and capital expenditures in an uncertain trade environment. He believes that while tariffs could temporarily boost inflation data, economic weakness could ultimately lead to a decrease in demand, making tariffs a "net deflationary" factor, where prices rise briefly before falling due to slower economic activity.