The Phantom Menace?

03 Feb 2025 2 min read

Daily update

Economists are geeks. Star Wars parallels are tempting: US President Trump as the Trade Federation leader; Trump鈥檚 largest donor Musk as Chancellor Palpatine, railing against bureaucrats; and economists as Jedi Knights. But threatened US trade taxes have real consequences. Investors鈥� hope is the precedent of Trump鈥檚 rapid retreat from taxing Colombian imports.
Even if short-lived, threatened tariffs have two consequences. Trump renegotiated NAFTA in their first term, and has now torn it up. Distrust may make negotiating trade deals more difficult. If the news cycle makes US consumers fearful about real income growth or job security, they may be less inclined to spend.
The direct impact of the taxes does most damage to complex supply chains. A component in a US-made auto might cross the Mexican border a dozen times or more. A 25% tax on each Mexico-to-US flow quickly raises costs. Higher auto prices imply higher second-hand car prices, and higher auto insurance costs.
US price increases will be rapid for some items, with reports of fuel companies announcing price increases already. There may be profit-led inflation if consumers expect price increases. China was able to reroute exports after Trump鈥檚 first-term taxes, but that is difficult for Canada and Mexico (some of China鈥檚 rerouted exports may have gone via those countries).