Tariffs Will Not Go as High as Americans Expect
When the details of Donald Trump’s tariff plans are eventually revealed, they’re almost certain to be lower than most Americans expect.
A recent poll conducted by economists from the University of Texas, the University of California, and the University of Chicago finds that Americans anticipate sweeping tariffs across all trading partners, with levies reaching 35 percent on goods from Canada and 42 percent on goods from Mexico. Europe is expected to face tariffs of 35 percent and goods from the rest of the world—excluding China—is expected to be hit with 39 percent tariff rates.
These are far in excess to anything Trump has proposed and greater than the tariff rates currently under consideration by White House and Treasury officials. What this suggests is that the indefatigably persistence of media stories warning that Trump’s tariff policies will raise prices for U.S. consumers has had a distorting effect on the expectations of the American public. Americans believe that Trump must be contemplating very high tariffs because they receive so much attention from the establishment press.
In reality, Trump has said he is considering imposing a 25 percent tariff on Canada and Mexico starting February 1 if they do not cooperate with U.S. efforts to prevent Chinese goods, illegal drugs, and illegal aliens from entering our country. Since that demand is not only entirely reasonable but relatively easy to comply with, it’s likely that there will not be any tariffs levied at all. Alternatively, if the tariffs are imposed, they are likely to be short-lived.
In his confirmation hearing before a Senate panel this week, Trump’s Commerce Secretary nominee Howard Lutnick appeared to indicate that it was likely the tariffs on Mexico and Canada would not be imposed.
“So this is a separate tariff to create action from Mexico and action from Canada,” Lutnick. “And as far as I know, they are acting swiftly, and if they execute it, there will be no tariff.”
Trump Isn’t Bluffing
There’s still some chance that Mexico or Canada decides to test Trump’s determination by resisting his demands. That chance is probably lower after the recent demonstration of Trump’s willingness to impose a 25 percent to 50 percent tariff on Colombia over that country’s refusal to accept its own deported citizens. Trump is not bluffing when it comes to tariffs, and it would be quite foolish for Mexico or Canada to attempt to call his hand.
The global economics team at Bank of America recently described the question of whether Trump will impose tariffs as “Schrödinger’s tariffs”:
In 1935, the Austrian physicist Erwin Schrödinger, designed a hypothetical experiment, famously known as the Schrödinger’s cat experiment. In a nutshell, the experiment goes, if you place a cat and something that could kill the cat (a radioactive atom) in a box and sealed it, you would not know if the cat was dead or alive until you open the box, so until then, the cat was in a sense both dead and alive.
The Schrödinger experiment resembles the dichotomy that we find today with potential US tariffs on Canadian and Mexican products. The tariffs are alive in the sense that President Trump has said he is going to impose them (most recently: 25% blanket tariffs to be imposed on Feb. 1). But tariffs are dead in the sense that President Trump has not imposed them yet (tariffs were supposed to be on “on day 1”). We also have in-between possibilities, such as temporary tariffs (as Colombia recently found out).
What we expect is that both Mexico and Canada will decide that it just isn’t worth looking in the box. Better to never find out by simply agreeing to help the U.S. control its borders, enforce trade controls on China, and crack down on drug smuggling.
But even if that’s wrong, the tariffs will be lower than what the poll cited above suggests people are expecting. As a result, there’s likely to be a relief rally when the actual tariff levels—and therefore any price increases that might get passed on to consumers—are much lower than expected.
Tariffmageddon Isn’t Coming
The survey also shows that while some businesses expect to attempt to raise prices if tariffs are imposed, the most common expectation among executives is that they will seek to avoid tariffs by sourcing goods from places not hit by higher tariffs. That reaction would make the imposition of tariffs lighter for Americans and harder for the countries that get hit by tariffs.
The same goes for tariffs on Europe and most of the rest of the countries that export to the United States. The survey indicates that Americans expect tariffs that are two or three to four times as high as the 10 percent or 20 percent tariff rates mentioned by Trump.
The one exception here is China. Trump has said he might raise tariffs as high as 60 percent. The poll shows Americans expect an average tariff of 50 percent. So, in that case, expectations are for lower than what Trump has indicated. We think, however, that it is likely that the China tariffs are phased in over time, starting at a lower level than 60 percent, so expectations might still be in excess of what will be imposed in the near-term.
The relentless fear-mongering in the establishment media over tariffs has created expectations of a Tariffmaggedon for imports. The reality is likely to be much less burdensome on U.S. households and businesses, which could mean that the economy will perform even better than people expect.
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