The state of tariffs is actively evolving within the US economy, and the fluidity is causing many to feel like they are stuck waiting before moving forward with plans. We will continue to report on this developing situation; for now, let's look at what we know and what we can expect based on what has been announced so far.
Even with 25% tariffs on all goods coming from Mexico and Canada, all steel and aluminum, and an additional 10% tariffs on all goods from China, the US economy will continue to grow.
Tariffs will ultimately be inflationary for the broader economy, but the immediate price impact will be more microeconomic.
Some of our clients will clearly benefit from the tariffs, at least initially.
Some of our clients will need to find a way to work through issues posed by the tariffs.
Retaliations will ensue.
When President Trump’s 25% steel tariffs were enacted in 2018, we kept our clients informed of changes coming to steel prices and continued to forecast prices so that our clients could plan accordingly. As new tariffs are put in place, we will remain committed to keeping you updated and bringing you the forecasts you rely on to run your business.
We do not change our forecasts until actual events occur. The proposed 25% tariffs on Canada and Mexico have been delayed until March. Until they go live, we are not changing our forecasts, as there is still potential for further changes to the tariffs; we want you to have a stable outlook you can rely on. However, our commitment to you is that we will discuss the risks and possible impacts to your forecasts so that you can plan and be ready for the potential impacts on your business.
For those with company-specific forecasts, do not hesitate to reach out and talk with your team of economists about your forecasts. The more you can share about your exposure to imported goods, the more we can assess and further advise you on what the potential impact will be.
We are frequently being asked if businesses should change their plans because of the tariffs. Your goal is to be profitable so you can keep your business thriving. We can help you assess those plans amidst the changing economic landscape so you can protect your profitability.
The adverse effects of tariffs will be more pronounced for the Mexican and Canadian economies than for the US economy. Size matters, and the goods trade is more significant in those economies than it is in the US. While the potential effects on our North American neighbors are larger, it is important to remember that an increase in tariffs does not mean that all trade will come to a screeching halt. Companies that have already made substantial investments in Canada and Mexico to support their US operations are not likely to abandon those investments. The US economy’s natural propensity is to grow, and the overall economy will continue to do so.
However, while the proposed tariffs are not likely to stop the economy from growing, they do have the potential to slow economic growth in some segments. Should tariff rates get high enough to make goods too expensive for consumers to stomach, it would result in decreased demand, which could slow rise for segments of the economy. Switching to domestic production to avoid the tariffs is not always easily done. The US does not have the immediate capacity or resources to supplant the goods that have been coming from Canada and Mexico. Spooling up new facilities in the US, for everything from steel production to automobile assemblies, is not something that can be done overnight. Furthermore, it requires significant investment.
We have seen an increase in reshoring during the past few years. While incentives to move production into the US could increase, there are still hurdles that may reduce the likelihood of all that trade shifting to a domestic landscape. One hurdle is the physical resources. The US is a resource-rich nation, but it still imports significant quantities of materials to meet the demand for finished products that utilize soft lumber, aluminum, steel, germanium, etc. Domestically sourcing all physical resources is not feasible. A second significant hurdle is the human capital needed to support more domestic production. With the US unemployment rate below the 10-year average and annual wages for US manufacturing workers at a record high, the labor pool is tight and projected to become more expensive as the decade progresses.
These factors add up to suggest that the trend of broader inflation will persist this decade and will be more pronounced in pockets as tariffs take effect. Higher inflation brings higher interest rates, which can pose a drag on economic growth.
The graphic below shows the relative scale of imports from Canada and Mexico.
Whether you are sourcing these items domestically or from Canada and Mexico, expect higher input costs as tariffs take effect.